The world’s stock markets have been especially volatile in recent years, leading many people to look for other options for their investments. As well as the traditional move to commodities like gold, we’re seeing an increasing move towards alternative investing in assets like fine art.
Fine art used to be a highly exclusive and hard-to-enter investment market, but fractional investing platforms like Masterworks helped open it up for everyday investors. Today, Masterworks has earned the right to boast, having driven some impressive returns.
In short, Masterworks turns blue-chip paintings into investment opportunities by creating a limited liability company (LLC) for each piece on offer, registering the LLC with the Securities and Exchange Commission (SEC), and splitting the LLC into several units, which effectively lowers the entry cost.
But there’s another option: investing in fractional NFTs (non-fungible tokens), or F-NFTs. In essence, F-NFT platforms like Otis, Fractional.art, and Unic.ly operate in a similar way to Masterworks — they divide an asset into several shares, and invite people to buy as many of those shares as they like, instead of having to find the money to buy whole NFTs. NFT art is virtual art that is backed by blockchain, and F-NFTs rely on smart contracts to verify ownership of each “share.”
There’s a divergence of opinion over which option is likely to deliver the best returns: fractional fine art, or fractional NFTs. While both have potential, there are certain factors that indicate fractional physical paintings may yield higher returns compared to fractional NFTs.
1. Market maturity
Fractional art investing may be new, but blue chip art investing is centuries old. The traditional art market already has a long-established history, and fractional art investing platforms benefit from that stability. The art market has proven its ability to generate substantial returns over time, with the contemporary art market, for example, seeing an average annual return of over 14% over the past 26 years, analysts from Masterworks claim.
In contrast, the fractional NFT market is new and still evolving. It’s true that interest in this asset class has grown significantly since 2021, thanks to influential NFT artworks like Doge memes and Mutant Cats, and NFT artists like Beeple and Grimes. By April 2022, PixelPlex reported that the total market capitalization of fractionalized NFTs was $86.4 million, and the broader NFT market is estimated to grow by over $113 billion, or a CAGR of 35.02%, between 2022 and 2027, with increasing demand for digital art serving as a key driver, according to Technavio.
But the long-term value and stability of F-NFTs has yet to be fully established. NFTs are generally purchased with cryptocurrencies, which have proven to be volatile assets several times over. Additionally, the regulatory outlook for F-NFTs is uncertain. It’s impossible to predict what future regulations could be imposed on the market, or how they could affect F-NFT prices and returns.
2. Tangible assets
Don’t dismiss the impact of tangibility. Fractional art investing platforms sell shares in a physical artwork. The fact that it’s a tangible asset adds a layer of value and prestige, and increases the trust that investors feel in the market as a whole.
But NFTs are the exact opposite. They are digital in nature and generally have no parallel physical existence. There are still questions around the long-term preservation and relevance of digital art.
Many feel uncertain that prices will hold up once the initial buzz wears out. It’s also not clear how and how long a digital artwork will last. Paintings and sculptures, on the other hand, have been with us for centuries.
3. Liquidity
Liquidity has long been a barrier for investing in fine art, because it takes time to arrange an auction or connect with a dealer before investors can complete a sale and liquidate their investment.
F-NFTs may have an advantage here, because their digital nature makes it easier to trade them globally. They don’t need to be valued in person by an expert, and can be sold instantly in online auctions and exchanges.
That said, fractional art investing overcomes the issue of liquidity for physical artworks. Secondary marketplaces on platforms like Masterworks enable investors to buy and sell their shares online whenever they like, just like selling shares from the stock exchange. With fractional investing, you no longer need a network of connections to buy and sell blue-chip art.
4. Rarity and Scarcity
Traditional art is often unique or produced in limited editions, making it inherently scarce. This scarcity, coupled with the tangible nature of the artworks, can drive up demand and increase the potential for higher returns.
On the other hand, the artwork associated with NFTs can be easily reproduced. It’s true that individual NFTs can have limited editions or unique characteristics. Some NFTs parallel a single digital artwork; for example, artist Damien Hirst burnt (literally) thousands of paintings to turn each one into an NFT. But the overall supply of digital art is virtually limitless.
This abundance might limit the potential for significant value appreciation in the long run.
5. Expertise and predictions
Traditionally, you’d need some knowledge and experience to identify artworks that are likely to appreciate in value over time. Ordinary investors without an art background would struggle to predict future trends and preferences. But fractional investing platforms use experts to select and manage artworks, so investors don’t need to trust their own judgment.
NFTs don’t require the same insider knowledge about artists, art schools, and market trends, which creates a more level playing field. However, the value of NFTs and F-NFTs relies a lot more on hype and popular opinion, which can be difficult for anyone to predict. NFTs are still relatively new, so there hasn’t been time to discern reliable patterns in the market.
F-NFTs might deliver higher returns than fractional art investing in the short or medium term, due to their new and speculative nature. However, the risks are far higher too, and it’s challenging to confidently predict the long-term health of the market, no matter how hard analysts try. Over the long term, fractional art could drive steadier and greater returns on investment than F-NFTs.
There are no guarantees for alternative investments
Ultimately, every investment brings risk, and there are no guarantees about returns. Both F-NFTs and fractional fine art investments should be approached as long-term investments that are part of a diverse portfolio. Choosing an investment platform, whether for F-NFTs or fractional artworks, that takes due diligence seriously, will help you complete the process without regrets.
