The value of all Art, including NFTs, lies in the eye of the beholder

Non-fungible tokens are establishing themselves in the mainstream, disrupting experts and launching valuation discussions. As with any market, buyers and sellers will ultimately be the judge.

Precis

Safe Harbour

His research is intended for the sophisticated investor to assess market developments and company performance and make insights. His comments are in no way intended as a solicitation to trade in any securities. All comments are subject to Risks and Uncertainties outside of the control of the author.

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Non-fungible tokens: A Primer

NFTs are tokens that are non-fungible, meaning not exchangeable equally for anything else. A bitcoin is worth one bitcoin, but an NFT is a unique digital asset and like a diamond or a physical baseball card, no two are the same.

An NFT can be likened to a file format that conveys digital ownership of a digital asset. Similar to the Mona Lisa as a painting, an individual entity “owns” the unique digital asset

The current record for an NFT sale was approximately $69 million in March 2021 for work by digital artist Beeple. This NFT was sold at a Christie’s auction in the same manner as other traditional art, giving a sense for how NFT’s can be transacted on the high-end. There are also NFT platforms where users can create, buy, and sell NFTs.

Valuing art of all kinds is a challenge

Figure 1: One of the most expensive pieces of TradArt in the world.

Voice of Fire by Barnett Newman. Source: http://www.barnettnewman.com/voice-of-fire/)

In order to have a strong opinion, you have to know enough about NFTs

The TradArt market, with all of its similarities, is a US$60 billion market that we know of — meaning after removing the effect of black market or under-documented activity. I will continue to attempt to compare the sizing but at the moment it appears to be hovering in the >5% run rate range, which is certainly material yet with 10–20x growth potential to hit the same size transactionally. I have to admit this is very back of the envelope math in two relatively opaque markets at very different stages in their maturity.

Figure 2: The TradArt Market Globally.

Source: McAndrew, Dr. Clare. “The Art Market 2020.”

Crossing the Chasm: are NFTs reaching a material level of acceptance?

Source: The Block.

Harkening back to business academia, this does look suspiciously like Geoffrey Moore’s iconic yet simple chart, Crossing the Chasm. Doesn’t Figure 3 look like the earliest adoption period, prior to the “small chasm”? The early adopters are blockchain enthusiasts, pioneers, early users who were ready with their digital wallets and knowledge of the space. The Early Adoption segment is rounded out by Early Pragmatists and the small chasm could be a correction or lagging ecosystem changes. So, the next major phase, the real Chasm, hasn’t even begun, which is prior to becoming technological reality accepted by the masses.

Figure 4: One of the most expensive pieces of TradArt in the world.

Source: Moore, Geoffrey. Crossing the Chasm.

Clear risks to watch for in the short-term

Regulation approaches in different countries will be both co-ordinated at times and completely decoupled at others. Different countries will impose stricter pre-emptive restrictions faster (for instance, China-type systems that are quickly enacted under the mandate of protecting stability in the financial system). Co-ordinated efforts with regards to AML policy will also gain priority if trading value remains high or grows.

Naysayers will exist for all kinds of reasons.

Anything this exciting will cause experts of all kinds, from influencers to thought leaders, to have an opinion. I’m reading dozens of them. These are intelligent, innovative people who are accustomed to fast change and cyclical developments.

Going back to the TradArt example, many people balk at prices that others find reasonable. Also, as I said earlier, in order to be a legitimate naysayer one would need to do a certain amount of homework on the asset class. Simply expressing that one doesn’t understand something doesn’t make it a farcical investment. There is no question the risk profile of NFTs is on the higher end, but I would argue owning anything with the aim to trade it short term comes with enormous risk as well. Remember, fraud is fraud and can affect the local corner store or the largest investment bank. Arguably there are elements of enhanced security and title with NFTs than many traditional collectibles.

NFTs will bear the risks of the broader markets generally, and cryptocurrency and technology markets. This includes headline risk and customer confidence in blockchain protocols.

Summary

© 2021 Thomas Kennedy. All rights reserved. See Disclosure Statement

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