NFT: Subject of speculation or source of return?

A CryptoPunk measures only 24 by 24 pixels. 10,000 of these small figures were created by two software developers as part of an art project in 2017. They are stored as a kind of collection card as non-fungible tokens (NFT) on the Ethereum blockchain. And the digital mini-artworks are worth millions of dollars: In February, CryptoPunk # 5822 was sold for $ 23.7 million; CryptoPunk # 7523 changed hands in the summer of 2021 for $ 11.7 million – in 2017 it was originally sold for € 50.

What are non-fungible tokens?

It is trendy to own digital artwork. Artist Beeple has a big part in the hype: In March 2021, the digital artist’s work “Everydays: the First 5000 Days” was auctioned off by auction house Christie’s for $ 69.3 million.

But despite the media attention that Beeple’s work received at the time: the NFT is still largely unknown in Germany. 68 percent of those surveyed by the digital association Bitkom stated that they had never heard of non-fungible tokens. And only 5 percent of respondents think they understand what NFT is and could explain it to others.

In short, it is a testament to who owns a digital work. This evidence is stored in a large computer network, which is why NFT is considered unique and traceable and almost unmanipulable.

“NFT uses blockchain technology to provide decentralized, unchanging digital proof that you own something. It can be digital works, but the vehicle’s registration document as digital proof of ownership of a car can also be mapped as an NFT,” says Benedikt Faupel, Blockchain expert at Bitkom.

NFT democratizes the art market

Interest in NFT is growing in the art market. More than a quarter of art buyers plan to invest in non-fungible tokens by 2022. This is stated in the “Hiscox Online Art Trade Report 2021”. Technology democratizes the art market. It ensures that access to the art market has become easier for everyone, it creates transparency – and it makes transactions manageable. In the rarest of cases, however, millions are paid: the average price for NFT artwork on the Nifty Gateway platform is $ 1,228.

“NFTs are important in two ways: they embody a digital work of art, and they can also serve as digital proof of a physical work of art,” said Alina Sucker, underwriting manager art & private clients at specialty insurance company Hiscox. The latter point has game-changer potential in relation to origin: Ensuring traceability is often difficult for works of art, but very important for the value – through which hands has a work of art passed, in which galleries was it previously exhibited? Above all, contemporary works of art have the chance of a complete lineage as a differentiating feature through the NFT. “

NFT-secured art as a long-term investment?

When you look at the buyers, however, one thing becomes clear: According to the “Hiscox Online Art Trade Report 2021”, those who buy digital art have other reasons than buyers of normal works.

93 percent of buyers of traditional artwork cited their emotional value as a reason to buy; 62 percent also hope for an increase in value. The situation is different with digital art: 82 percent of NFT buyers hope for the highest possible return; the emotional value of the works was only a reason for purchase for 67 per cent. Or in other words: the work of art itself becomes secondary to them.

However, Robert Read, director of art and private clients at Hiscox, warns against caution given the immaturity of the NFT art market. The NFT art market is “still in the ‘wild west’ phase of its development. It is still largely a speculative market, so we can expect a lot of ups and downs at the moment,” Read said.

Performance can not be predicted

The real value of digital works and, above all, their value development can hardly be predicted – in contrast to valuable individual works or editions by famous artists. In addition, the market for NFT art is still too young to be able to assess whether this is short-term hype or whether a long-term increase in value can be expected. And therefore: An investment in digital art is associated with a higher risk than an investment in a well-known “real” painting.

Crypto-entrepreneur Sina Estavi recently had to figure out what that means in practice. In the spring of 2021, he bought Twitter founder Jack Dorsey’s first tweet for $ 2.9 million. A year later he wanted to sell it again. But instead of the hoped-for $ 50 million, the highest bid on the tweet’s NFT was initially just over $ 7,000. Estavi suspended the auction so far – to wait for a better offer.

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