NFT came out with a bang in 2020 and took over the digital art industry in a storm.
Now, almost two years later, NFT is dying a slow death, with hundreds of thousands still hoping to find other fools to hold the bags by following whales who pump.
Through this short-lived fame, NFT has shown us the potential of what could happen to the art industry if democratised. I’ve been studying this topic for a while, and it is even more exciting how the art market can be changed.
Forget about all the hype & buzzwords for a while and think art as we knew it: physical paintings transacted in fiat currencies. Does it sound fancy, expensive, and unattainable? Take away the aura of owning a Van Gogh, traditional artists aren’t different from digital artists at the core.
In both traditional art and NFT markets, there are five secondary market traders and three thousand wealthy individuals who lead and influence the market.
The NFT world works exactly like the traditional art market
I’m sure you have heard it before, but here’s how it works in the art industry (from what I’m seeing, this may be how the Beeple NFT worked too):
I, along with nine other friends, buy 20 of artist Nobody’s artwork over time, starting at US$1,000, slowly increasing the purchase price over time to say, US$10,000.
Friend A submits one of Nobody’s artworks he owns for auction, and I go buy it for US$25 million. Friend A gives me back US$25 million post-auction. Major news outlets report this fantastic purchase, and all of a sudden, the 20 paintings we bought are worth US$25 million each.
We just made US$500 million (=$25 million x 20 paintings) out of thin air and made an artist super famous.
Also Read: How generative NFTs are extending the boundaries of digital art
When Nobody sells his painting for US$15 million on the primary market, that painting is going to be snatched up because it’s at a significant discount. Everyone knows he can flip that painting for US$25 million at an auction somewhere. We have created liquidity for Nobody’s painting.
Assume now my friends and I want to cash out on the US$500 million. Since we have 20 paintings to sell, the market can’t digest all of them at the same time; given we paid next to nothing for them, we are willing to sell them at US$10 million each, and we still made US$200 million.
Now the market price for Nobody’s painting is US$10 million instead of US$25 million.
Everyone who bought and sold Nobody’s painting before this drop made money and are happy, but the last person who bought Nobody’s painting at US$15 million has to either sell it for a loss or hold onto it, hoping for a bigger fool to show up.
This happens in a thin liquid, or rather, an illiquid market, where the valuation basis is inconsistent.
A peek into the world of NFT art
But the craze in NFT has given us a glimpse of what could happen to art if we had a big enough market that is transparent.
Everyone should be able to freely express his opinions about art, despite their prices, given how the game has been played. I wouldn’t say I like Basquiat’s art, and I should be able to criticise it. My prediction is if free market had been allowed, Basquiat wouldn’t even make it.
So how do we get the masses involved with art and truly democratise the industry? It likely isn’t with NFT, as crypto is hardly a mass-market product. But from NFT, we learnt that more people would be excited about art as an investment product. Money speaks louder, fact of life. Penny stocks have their places too.
Many existing collectors may disagree with me. But I’m not speaking to the “cultured” and snobbish few who can afford Picasso’s. We, the masses, can take ordinary artists without high-net-worth networks to the moon.
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Image Credit: troggt
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