Imagine you owned an original oil painting and decided to hang it on your living room wall. Would you be happy with strangers entering your home and consuming its beauty?
What about putting your original artwork in a gallery? By doing that, you’d be allowing other people to view it.
What about buying a print – perhaps 1 of 50 – and keeping it in your living room? You might not allow people to view your version, but 49 other strangers own exactly the same piece of art as you.
What about buying a print and then putting it in a gallery?
What if I scanned or took a photo of your print, and then printed it out myself and hung it on my own living room wall? Now, I have an artwork on my wall that looks almost exactly the same as the artwork on yours, but yours is worth a lot more than mine. How is that so?
Artwork is what is known as a Veblen good. Veblen goods have upward sloping demand curves, where the quantity demanded by buyers increases as the price increases. That contrasts with a normal good, where demand should decrease as price increases. In investment parlance, Veblen goods are also momentum assets, whereby the investment rationale for buying the asset is that someone else will pay more for it later, not necessarily because the asset is fundamentally expected to be worth more in future.
Although measuring fundamental value always requires some subjective input, the range of assumptions about the future is often narrow for most assets, such as stocks or bonds. Putting the obvious effects of scarcity and historical significance aside (an original Picasso is definitely worth more than a modern-day print), then for art, fundamental value is in the eye of the beholder and depends crucially on how one derives utility from it. That in turn depends on your answers to the questions we asked above, concerning exclusivity, rivalry and fungibility.
- Exclusivity concerns the degree to which you want to be the only person to have access to a particular piece of art
- Rivalry concerns the degree to which someone else’s consumption (viewing) of the piece of art reduces your own consumption
- Fungibility concerns the degree to which you are comfortable with someone else owning a piece of art that looks exactly the same as yours, even though it is not physically the same object
For example, if you aren’t comfortable owning a print but you don’t mind your original piece being displayed in a gallery, then you’re more concerned about fungibility than exclusivity. If you only buy originals and keep them locked up in your home or in a darkened safety deposit box, then you’re concerned about rivalry, exclusivity, and fungibility. If you don’t mind owning a print, then you’re less concerned about fungibility, and your feelings about exclusivity and rivalry will depend on how much you dwell on the fact that someone somewhere is looking at the same piece of art as you.
Framing it like this (forgive the pun), in economic terms artwork can range from being a fully private good to being a fully public good. Your answers to the questions on how you derive utility, and therefore value, will determine whether the value of a given image changes as you move along the public/private good spectrum.
A non-fungible token, or NFT, could then be classified in our framework as being like a piece of art displayed in a gallery. NFTs are sometimes created as originals (there is only one), and sometimes as prints (e.g., 1 of 50). In both cases, access to the NFT is usually not restricted, i.e., it is visible to anyone who attends an online ‘gallery’ where the NFT is being displayed.
NFTs have split opinion in the art and wider world, which makes perfect sense to us. Some are uncomfortable with the concept of NFTs; these people are concerned with exclusivity and rivalry. Some don’t mind NFTs as long as they own the only one; these people are more concerned with fungibility than exclusivity and rivalry. Some are happy with owning 1 of 50 of a particular NFT; if their NFT was a ‘normal’ piece of art, these people wouldn’t mind it being a print displayed in a gallery.
Many art enthusiasts and collectors cite the utility they derive from creating positive “externalities”. That is, they derive additional value from others being able to view the art that they own. Enjoying something more because others cannot enjoy it – or deriving value from others’ lack of value – is now, thankfully, seen as a rather medieval trait. That is the extreme form of exclusivity and rivalry and is probably now the exception rather than the rule in the art world and in wider society. Probably more common is the more moderate form of exclusivity, where enjoyment is generally agnostic to others’ enjoyment, perhaps with a slight sweetener knowing that most people don’t get to enjoy what you have. Put another way, most people feel more strongly about exclusivity than rivalry. We’d even bet that the word ‘exclusive’ elicits a positive feeling in you, especially when compared with ‘rival’. Perhaps that post-medieval shift to a more democratised model of art underlies the emergence of NFTs in the first place.
Technically, the supply of art prints could increase, but usually there is an implicit understanding that supply will be constrained to the original promised edition. Similarly with photographic art. If more were printed after the first set were sold, the artist could risk undermining themselves and the value of any future works of art they produce. The same is true with NFTs, although arguably the constraint on supply is even more binding as the code that underlies the NFT could set a hard rule about the number of ‘prints’ in the edition. Supply discipline is then not entirely reliant on the artists themselves.
So, as an investor, should you buy NFTs? The simple answer is that, like normal art, some NFTs will likely go on to increase in value by orders of magnitude. Like normal art, the investment driver for those pieces will likely be momentum, possibly combined with some element of true fundamental value, like the historical significance of that Picasso. But, also like normal art, most NFTs will likely make modest returns, maintain static value, or decrease in value, possibly even to zero. But remember that the value of art, including NFTs, is to a great extent in the eye of the beholder. In all cases, then, how you derive utility, and therefore how you determine value, will depend on your answers to those questions of exclusivity, rivalry, and fungibility. How you derive utility will in turn determine, in large part, whether you’re comfortable investing in NFTs.
To the pound 