Collectable Art: The Most Inflationary & Illiquid Asset Class

Exceptional high returns make rare collectable art a darling of the very wealthy investors. However, art assets lack liquidity. Then, there are dormant non-collectibles that constitute our priceless but unmonetizable cultural heritage. Blockchain will soon change all of that.

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Art industry estimates the total value of global art assets at $3 trillion, but only a tiny fraction of it register sales. The current art market estimates do not include the value of countless murals and frescoes of high renaissance or pre-renaissance years as they cannot be bought or sold.

The Global Art Market & Its Pitfalls

Most of the world’s best art resides in famous churches, museums, or galleries. This certainly applies to works by Old Masters like Michelangelo, Raphael, Leonardo, Rembrandt and Vermeer.

Although the global art market saw 6% growth reaching $67.4 billion in total sales in 2018, the market remains opaque, unregulated and extremely illiquid. Gallery owners and auction houses charge commissions of 25 per cent or more, sometimes negotiable, and art buyers must avoid the pitfalls of forgeries, fakes, long lead times, limited transparency, and rapidly changing tastes. Because of those reasons, less than 2 percent of qualified buyers participate in this market leaving much of the $3 trillion art assets off market.

The Inflationary Advantage Of Art Assets

Collectable art is one of the most inflationary asset classes available to wealthy individuals. Inflation is defined as a sustained increase in the price of goods and services. While inflation may be a bane for the consumer, it is a boon for an asset owner, particularly for an art collector. Inflation can mean continued profit as it adds to the art collector’s asset portfolio. As such, art qualifies as the best long-term investment. On top of it, non-financial dividends from loaning / donating display rights to art museums/galleries serve altruistic incentives to a good majority of art collectors who are also philanthropists.

The best way to measure inflationary / deflationary trends is through various indices, such as consumer price index (CPI), S&P 500 index, NASDAQ Index, so on and so forth. Creating an index is easy and reliable for any securitized asset. Although art is not securitizable, the art industry did create a few indices that may not be perfect, but do give us a fair idea of inflationary price movements in art industry vis-a-vis any traditional asset class.

Of all the different categories, art from “Old Masters” delivers the highest return on investment. A Francis Bacon triptych (meaning a three-panel piece of art) painting “Three Studies of Lucian Freud” was sold for a whopping $142.4 million in 2013. In 2008, another Bacon triptych was sold for a mere $86 million, that’s more than 60% appreciation over 5 years. Compared to the rise in consumer price index for the same period the return was 6.6 times the official inflation rate.

An anonymous buyer paid $179.4 million for a Pablo Picasso in 2015, despite its $40 million valuation, and its 1997 sale price of $31.9. It proved to be an excellent investment with over 5.6 times or 31% APR.

Another example of eye-popping profiteering is a nude by Amedeo Modigliani, which went for $157.2 million at Sotheby’s auction last year. The owner had paid $26.9 million for the same in 2003. That’s 5.8 times more, or about 42% APR.

Between 2000 and 2018, the Artprice100® index grew by 360%, generating an average annual return of 8.9%.

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Growth of the Artprice100® index during 2000–2018 (360% growth)

This approach to investment in the Art Market allows the financial and investment community to apprehend the Art Market via the art of “index management”. This average annual return of 8.9% represents the profitability of the art market’s most stable segment.

Art, as a tangible asset, can protect against inflation. It has repeatedly demonstrated that it can perform better than equities in an inflationary environment.

Art Assets’ Liquidity Problem

Artwork is highly illiquid because items are often one of a kind, with a limited pool of potential buyers. Short term buying and selling is plagued by high fees and illiquidity. Sotheby’s charges fees as high as 25 percent.

To a large extent the tremendous inflationary advantage of art assets, unfortunately gets neutralized by its lack of liquidity. Moreover, a multi-hundred million dollar painting neither gives the person looking for a job, a job, nor does it provide any monitory benefits until it finds the next buyer years later.

Introducing liquidity into the art market, therefore, will not only boost the value of art assets but fuel growth.

Tokenization: Solves Illiquidity & Even Monetizes Dormant Artwork

The famous Andy Warhol once said, “Making money is art.” But what about making money from art?

The art of making money from art can be revolutionized by introducing liquidity into the art market. Securitization is the traditional means of increasing liquidity of an asset class. Unfortunately, the dynamics of art market makes securitization of art assets very difficult and inefficient if not impossible. As suggested previously, the world will eventually move from securitization to tokenization, essentially because blockchain technology can automate the trustless transfer of digital assets thereby decentralizing and enabling the performance of valuable contractual deliverables without human engagement.

Solving Illiquidity

Tokenization is indeed the next quantum leap in asset-based securitization, which is already happening in some of the traditional asset classes, such as real estate, equity funding and even venture capital.

However, global scale decentralized tokenization of art, whether collectable or not, monetized or dormant, is a totally different animal that may not survive without a major role of art underwriting. We believe a new breed of art underwriters (not art insurance but art influence equity) is waiting to be born.

At least one blockchain-based startup has taken the lead in taking up the challenge of introducing liquidity into the art industry — Monart is bringing tokenization to the collectable art marketplace.

Monetizing Dormant Artwork

Tokenization makes it possible for anyone to own a piece of anything of value by allowing tokens to be divided into tiny units & sold to individual investors. At least, one of the world’s top art collectors, who sold the world’s most expensive painting by Paul Gauguin in 2015 confesses:

over 90% of our assets are paintings hanging for free in the museum.” The art collector is Rudolf Staechelin and the museum is Kunstmuseum in Basel. Whether hanging free or locked up in the vaults, it’s a norm with most art collectors. Why keep it dormant?

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The Last Supper — Leonardo Da Vinci (Image Credit)

If monetization of Mona Lisa could be conceived, why not the monetization of dormant art across the world?

As much as we don’t realize there’s humongous amount of dormant art sitting around the world. It is dormant because it can neither be bought, nor sold.

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The Last Judgment — Michelangelo (Image Credit)

Neither can it be monetized in any other form beyond the meager tourist/visitor fees that barely cover their maintenance costs.

As I was wondering if there could be a way to value some of the world’s most popular artwork, such as Da Vinci’s “The Last Supper,” or Michelangelo’s “The Last Judgment,” I stumbled upon a very interesting research paper presented by the Appraisal Institute of Canada. The study attempted a valuation of the Statue of Liberty. If valuation isn’t a hurdle, we believe even dormant art assets can be monetized via tokenization. That will further boost our estimates of the quadrillion dollar Influence Capital humanity is blessed with. Yet another proof that 21st century economics isn’t about “scarce means” anymore, its about dissemination and redistribution of the abundance that we are already blessed with.

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