NFT pics are the funhouse mirror high-end art deserves
The funny thing about many of the absolutely insane things happening in the world today is that from a certain perspective, they actually make perfect sense. Take the famous brands buying metaverse real estate, for example. At first glance, it makes no sense at all. At second glance, assuming the user base of the respective projects grows over time, it’s like buying an ad banner on a website, just at a higher markup. Considering how many headlines you get on the purchase, the purchase becomes quite sensible even if you do nothing with your plot of virtual land.
It’s quite possible to make the same case for nonfungible token (NFT) art, another major trend in the blockchain space, at least in how much buzz it has generated. Just a few months ago, Paris Hilton and Jimmy Fallon checked how deep the cringe abyss goes on live TV as they showcased their Bored Apes. And that’s just a few of the mainstream celebs who have joined the NFT art hype train recently, with quite a few of them managed by the same entity, United Talent Agency. And would you believe it, UTA also represents Yuga Labs Bored Ape Yacht Club’s makers.
Welcome to the club, @guyoseary ! ☠️⛵️ https://t.co/PcUtD67zIF
— Bored Ape Yacht Club (@BoredApeYC)
This may hint at an interesting nexus between the entertainment elites and the poster kids of the NFT scene. BAYC at least has more than pictures to offer, though, which is not always the case for NFTs we see popping up at leading auction houses Christie’s and Sotheby’s. As these two worlds move closer to each other, their similarities come into the spotlight — and reveal some pretty funky truths along the way in how we perceive both art and value.
Value is in the eye of the appraiser
Traditional art is quite effective as a store of value; it can generate some returns over time and is pretty convenient in the sense that a $100-million painting takes less space than the same amount in cash. But if the value of fiat comes from the financial strength of the issuing nation, with art, things are 100 times murkier.
What is art? Pretty much anything, one would think after a walk through a random modern art gallery. In fact, some of the most famous and modern artists, from Andy Warhol to Jeff Koons, work to deconstruct our understanding of what art is and what can be art. If anything, we live in an age when a banana taped to a wall can be on display in an art gallery, valued at $120,000. Someone ate it and called the deed an act of artistic expression, but fear not — the fruit was soon replaced, and business went back to as usual.
From this banana switcheroo, we can deduce the fruit was technically fungible in as much as this piece went. In other words, the value of the art piece did not come from one specific banana, but from any banana being held in place by, presumably, an equally fungible piece of duct tape. So, what exactly made for the $120,000 price tag? The artist’s brand, the prestige of the gallery, and a few other quite ethereal factors.
Things get even funnier when we try to apply the same logic to other valuable pieces of art. The Black Square, one of the most famous paintings by Kazimir Malevich, changed hands for $60 million in 2008. The painting displays exactly what you would think — a literal black square — and, as such, has a questionable value in terms of pure aesthetics. Furthermore, to check the painting for authenticity, we’d be forced to rely on little more than an in-depth analysis of its components, paint and canvas to establish if they are old enough and typical enough for Malevich’s era and locality. But if someone were to randomly munch on this artwork, there is no way in hell we’d be able to replace it with another black square, even though the aesthetic value would be more or less the same. The value of this piece comes from the hand that drew it, and anyone who’s not Malevich won’t do.
This is not to say that art valuation is entirely subjective (Malevich is Malevich, after all), and yet collective subjectivity manifesting itself in changing trends and fashions underpins it to the point of being pretty much inescapable. Couple this with the wild money some people are willing to dish out for these quasi-ephemeral goods, throw in some centralization and insiderism, and you get a brew that would probably be unimaginable in any other industry.
The shady underbelly
While many would probably want to believe in Cinderella-style tales of a starving artist whose star one day takes off, the reality is different. At the core of the art world, as a massive study revealed in 2018, is a network of about 400 venues, mostly located in the United States and Europe. If you happen to go on show in one of those, pat yourself on the back and give your muse a high-five. If not, though, things could be bleak-ish. Success, including as measured by the valuations of your works, is a matter of drawing the interest of the right dealers, critics, publicists and curators — a wide, but still relatively limited crowd.
On the flip side of this coin is the wild variety of financial trickery a wealthy individual can do through the art market, especially if they know the right people. Thanks to its openness to anonymity and intermediaries and affinity for big piles of cash, art is a great way to launder dirty money. While major auction houses do conduct due diligence checks, these are oftentimes voluntary, and the complex ownership structures add to the obscurity, enabling criminal money to flow into the market.
Art also works miracles for those in the business of bribery without raising too many red flags. Imagine a businessman on a hunt for a tender approaches an official in charge of the said tender with a request to put that very cool porcelain vase up for auction. At the auction, the vase would go for a hefty sum, way over its initial valuation. Who bought it, and who’d get the tender? You said it, not I.
Besides all that, art makes for a neat financial instrument for things that aren’t even illegal. Tax write-offs through art donations are very much a thing: Snatch a few works of a soon-to-be star for $1,000, invest $500,000 into the network to amp up their valuation to $10 million, generously donate them to a museum, and there you go — no taxes on that much of your income. This is still an oversimplification — things can get even more interesting.
High-value art represents a relatively small portion of the overall industry: Just below 20% of art sales in 2020 saw price tags over $50,000. A similar breakdown is now happening in the NFT art market, where top collections generate millions in resales on the secondary market, but most trades are actually pretty small. Indeed, such figures add credit to the view that the entire market is basically made by several thousand investors pouring millions into what is essentially irrational investing.
By creating artificial scarcity, NFT art seeks to replicate the mechanism behind the high-end traditional art. A better question is whether they can work as well as a store of value, and that’s a tough one to answer, given the intrinsic subjectivity of artistic value as such. Yes, an NFT is a token with a link to a picture in its metadata. But does that mean anything in a world where a fungible banana can cost $120,000?
One could argue it actually still does, looking at the fate of the NFT for Jack Dorsey’s first tweet, once auctioned off for $2.9 million and then received a bid for just $280. In just a year, the token’s value in the eyes of the market plummeted by 99% — a reflection of the changing trends and perceptions in the crypto community and the current state of the crypto market, which naturally affects NFTs’ capability to store value.
Still, the genesis tweet NFT could still have changed hands at $50 million had a single collector with enough Ether (ETH) to go around decided that the token is indeed worth such a price. Bored Apes are still trading with an average price counting in hundreds of thousands of U.S. dollars. There are signs that the market is in decline. But why shouldn’t it be, given the entire crypto market is down?
So, one of the key features making high-end art handy for shadowy business — the often arbitrary nature of its valuation — is more or less in play with NFTs as well. What may make or break NFTs’ future as a new rendition of high-end art is thus whether they can also offer the same legal and financial flexibility that commodified traditional art brings to the table.
A Chainalysis report points out that money laundering accounts for a small share of NFT trading activity, even despite a recent spike. In this case, though, money laundering specifically refers to using crypto associated with hacks and scams to buy NFTs, which is a bit too narrow if we recall the backstage stuff happening in the traditional art market. Instead, what matters is whether and how the NFT scene develops its engine that imbues art with value, the same way as museums, galleries and auction houses do. If anything, the traditional art institutions moving deeper into this space could be part of it, and so can the aforementioned star-spangled shenanigans.
On the other end of this equation are, well, the end-users, for lack of a better word, and all of the off-chain legal intricacies. Let’s take taxes again, for example. When selling an art piece from your collection, you have to pay the capital gains tax. The same goes for selling an NFT.
With traditional art, though, you can avoid paying this tax with a neat trick. You can keep your treasures in a high-security warehouse in one of the world’s many freeports, and it can sit there for decades, changing hands, but not its location. As long as the art sits there, there is no need to bother the esteemed taxman about the transactions.
NFTs live on-chain, and any transaction moving its ownership to a different wallet will be open for anyone to inspect — including the U.S. Internal Revenue Service. Hypothetically speaking, even when it comes to freeports, there could still be a few tricks to try. Say you have a cold wallet with a bunch of expensive NFTs, and you keep them in a freeport, albeit the tokens are still on-chain. And when you decide it’s time to sell them, you sell the device itself, with no on-chain transactions. Would it make sense? This depends on the exact return on investment everyone involved gets.
This leads us to an ironic conclusion: In a world where art is a speculative asset, the future of NFT art depends not on its artistic value but on its properties as a financial instrument. Can you get a tax cut by buying a cheapo NFT, amping up its value through a few wash trades (in other words, trading it between your own wallets) and donating it to a museum or a charity? How about staking, or temporarily locking your NFT into a digital protocol? Can you stake it into a museum’s wallet, perhaps, to get some tax relief? Can you fake an NFT theft, simply bouncing it to your other wallet, to write off some tax on capital loss? Would it make more sense to buy an NFT from the official in charge of that juicy, juicy tender, or perhaps that cool vase on their table works better?
These are all good questions, and if you earn enough to pay people specifically for figuring out how you can avoid taxation, your lawyers are probably already looking into that. For everyone else, the NFT art market is at best another venue for supporting their favorite creators, which is quite different motivation-wise from getting rich quickly. In this respect, it has little more to offer than a rat race for finding the next big thing, and judging by the cool-off and the dominance of the top collections, the next big thing may only come from — and for — the big boy club.
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