In 1959, Yves Klein created the Zones of Immaterial Pictorial Sensibility. The work consisted of eight series of parodic checkbooks which could in total confer buyers the ownership of 101 zones of empty space.
Although he only ever sold 8 of those preposterous pieces, at least one fetched 160 grams of gold (a little under today’s $10.000). Klein himself appeared surprised he had sold any1.
He would then likely be utterly astonished by the madness that has descended upon the art market with the latest boom in NFT prices2.
A quick NFT primer
What are NFTs anyway? Non-Fungible Tokens stand at the intersection of crypto and art3 and have recently taken both worlds by storm. They’re essentially receipts on a blockchain proving that you own a given digital object. Like Klein's checkbooks, they're not as much the work of art as they are the receipt proving that you, and you alone, own it.
More accurately, they’re not exactly tied to you as a person; rather they belong to a pseudonymous “address” whose owner may or may not be identifiable. Take for example CryptoPunk #8888, one of 10,000 unique and very valuable pixel art characters.
It recently sold from address 0x301874 to address 0x999e77 for $2.87 million worth of ETH, the currency powering the Ethereum Network. Until they publicly come forward, however, both buyer and seller identities shall remain unknown.
What makes Art valuable?
Why would someone pay millions of dollars to acquire… a jpeg file?
Keep in mind you’re not paying for the privilege to access the art work. Anybody can download that same jpeg file you’re paying for, much like anybody can commission a perfect replica of a Picasso, at a fraction of the cost of the original.
Drawing on parallels with both “traditional” art and collectibles, I find four components that make up the value of an NFT.
Emotional engagement
Signalling
The drive to collect
Resale value
Emotional engagement
Emotion is by definition extraordinarily subjective and would seem to apply much more readily to traditional art. It’s easily conceivable, even for non-art-lovers, how contemplating what one knows to be an original, blessed by the very artist’s hand, might be awe-evoking in a way that would not transpire when faced with a replica, however perfect it might be.
I would argue that owning an NFT for the most part cannot command the same emotional response, especially as long as anyone can enjoy the piece as much as you do in every way but ownership. This is however my very own opinion as an avowed nojpeger, and I would be very curious to hear from NFT aficionados how they might feel differently.
Signalling: is your Punk like a Rolex?
A popular explanation for buying art, expensive or otherwise, is signalling. Signalling is, in short, what you hope to convey to others. In the case of art, you may first want to show off your wealth, much as you might when buying a luxury watch or a sports car.
The purchase might also be meant to showcase how tasteful you are, or to demonstrate to a community of like-minded art-lovers how much you belong with them.
Signalling would certainly seem to matter a great deal within the NFT community. Venture through Twitter, Discord or Telegram channels and you’ll find many participants sport avatars from some of the most famous NFT collections: Punks, Apes and Penguins all trying to find the next investable gem. People even argue the very point that NFTs are, in fact, like Rolexes
Yet I find it very unlikely that this would generally matter a great deal in a purchase decision. There are already extremely potent means of signalling within the crypto community. If you want to show off your wealth all you have to do is brag openly and consistently, as many of the most popular CryptoTwitter accounts do. Bragging in the cryptoverse is about as encouraged as it would be frowned upon in the real world. And if you want to prove how you belong, there is likewise no need to display your expensive decentralized receipts. What you should do instead is adopt the extraordinarily powerful memes of this subculture. Else, you’re ngmi4.
Instead of signalling for inclusion, which could carry a large premium, what people seem to be doing is more akin to proselytizing. They actively want you to become aware of NFTs in general, of their community in particular. This, of course, is not specific to NFTs, but has been particularly salient for all things crypto and, to a lesser extent, for a few publicly traded stocks.
Because they drive adoption and network effects, lead development efforts and – let’s face it – “pump their bags”, communities are the alpha and omega of most cryptocurrencies, and so too, of NFTs. Collectors acquiring a piece from an artist become de facto impresarios and given the relatively small size of the market, they can wield an outsized influence on future sales.
The drive to collect
Admittedly, collectors of all ilks have been spending an undue amount of time and money on other items such as stamps, sports cards or coins. For perspective however, and according to Wikipedia, in the whole history of numismatics only a little more than a hundred sales topped a million dollars, 25 sports cards did, and only 5 stamps.
Meanwhile, this is a daily occurrence for NFTs, a type of collectible that hardly has a few years of age.
There has to be more than NFTs being “just another collectible” to explain the differential.
Resale potential
This finally brings us to the last reason one might have to buy expensive art: as an investment vehicle. This is where NFTs shine compared to physical art or more mundane collectibles, and where most of their premium must comes from.
Suffice to look at the discourse around NFT sales to be convinced this is the most important reason of the three. Little interest is given to debating the inherent artistic value of an art piece, or, in the case of non-art NFTs, its use cases.
The edge NFTs have over physical collectibles and art lies in a form of liquidity premium5. Because they’re objectively easier to resell through the online infrastructure people are more eager to speculate on their value. The last couple years have not been short of speculative fervor, which now seems to feed into NFTs.
I’m not suggesting that there is no artistic value to NFTs! Simply that speculation drives most of their value, to an even greater extent than it does traditional art or collectibles.
A useful way to think about it is to imagine what price they would command if buyers were forever unable to resell them. The Mona Lisa would still fetch dozens of millions. The fate of Cryptopunk #8888 on the other hand would appear less clear.
This is in no way an indictment of speculation or speculators, but if you plan on buying NFTs your valuation framework should be sound. Whatever your personal reason for acquiring an NFT, keep in mind it probably carries much less intrinsic value than its physical counterpart would.
“Incredible as it may seem, I have actually sold a number of these pictorial immaterial states...”, from The Chelsea Hotel Manifesto
If not, seeing how one artist shamelessly copied his performance into the digital realm might have done the trick: https://opensea.io/collection/ikb-cachet-de-garantie-1
Not just art in fact, but tokenized works of art will be the focus of this piece
Not Gonna Make It
“Liquidity premium”: all things being equal an asset that is easier to resell than another will cost more. The difference is called the liquidity premium