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Digital art: What are NFTs and why are they so valuable?

Erica Hall  |  17 Mar 2021Text size  Decrease  Increase  |  
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How do you determine value? Thinking about this today as I see splashed across the media news about a digital artwork that sold online for US$69.3 million. Now that's a really expensive JPEG file. What caused the price to reach such heady heights? Supply and demand, scarcity value, novelty factor, bragging rights? In the case of this artwork potentially a combination of all of the above.

The artist Mike Winklemann professionally known as “Beeple” was not well known outside of the digital art world. Now he is one of the most expensive living artists you had probably never heard of. Until now.

Christies was the auction house that sold his artwork and whilst they have an incredible pedigree in selling art which dates back to the 1700's, this was the first time they or any other major auction house had sold a piece of art that was entirely digital (with a NFT). I read that they themselves were unsure of how to value the piece. Its fair to say the auction went very well, it was a record breaker, and judging by the artist's twitter feed he appears to be amazed by the final price paid.

What was it about this artwork that made it so hotly contended? The sale of the artwork came with some interesting features:

  1. Sold with a Non Fungible Token.
  2. Purely digital artwork.
  3. A compilation of 5,000 individual artworks.
  4. Sale process managed by one of the most revered auction houses, Christies.
  5. Cryptocurrency was an acceptable form of payment.

Until Tuesday this week I had never heard of NFT's or Non Fungible Tokens. Crypto currency? Yes. Blockchain? Sure. NFT? Nope. I found out about them by chance when meeting with a business partner he mentioned NFT’s to me. "NF what?" I queried. He patiently explained the concept and how NFT's could be applied to assets such as artworks and music using blockchain technology. I was interested to hear about it but wondered where had I been all this time? He believes NFT's are the next big thing, just his opinion, absolutely not advice!

The record producing artwork by Beeple is titled “Everydays: the first 5,000 days", a digital asset compiled of 5,000 individual artworks. If the new owner(s) decide to sell the artwork in the future it will have to be sold as a whole, they will be unable to siphon off individual pieces to sell. Whilst the artwork is a rich tapestry of thousands of pieces the owners will be able to zoom in on each individual piece, so it can certainly provide them with some viewing variety.

The First 5000 Days

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Everydays — The First 5,000 Days, by an artist named Beeple, released by Christie's (Christie's Via AP)

There is no doubt in my mind that an important part of the value of the artwork was that it was sold with a non fungible token or NFT. The NFT is essentially a digital trademark providing proof of provenance and ownership. With the use of a NFT authenticity of the asset is forever assured; using blockchain technology the token will be stored on a digital ledger. Should the artwork change hands in the future the NFT would go with it providing an important safeguard that this is the original piece, helping combat the risk of fraud and forgery. This can be a serious and expensive issue in the art world which is well covered in the popular BBC television series “Fake or Fortune”.

It is easy to understand how a NFT can provide safety to buyers and sellers, particularly important for digital art which can be easily replicated. It will be fascinating to watch from the sidelines to see how the use of NFT's develop. No question that we really do live in interesting times.

is a senior business development manager with Morningstar Investment Management Australia. The views and opinions expressed are those of the author. They do not necessarily reflect the views or position of Morningstar Investment Management Australia.

This is a financial news article to be used for non-commercial purposes and is not intended to provide financial advice of any kind. Opinions expressed herein are subject to change without notice and may differ or be contrary to the opinions or recommendations of Morningstar as a result of using different assumptions and criteria. 

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