Masterworks Review: Should You Invest In Tokenized Fine Art?

Masterworks is a relatively young company, having been founded in 2017. The mission is to make it “possible for everyone to invest in blue-chip artwork.” Don’t take that phrase, blue-chip, lightly … Masterworks has pieces from artists such as Andy Warhol, Keith Haring, Claude Monet and Willem De Kooning.

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Historically, fine art investors tended to be of the wealthier variety. When it comes to blue-chip artwork, you can easily spend tens of millions of dollars for a single piece.

For example, back in late 2017, Leonardo da Vinci’s Salvator Mundi was auctioned at Christie’s for a staggering $450 million. The bidding lasted all of 19 minutes.

Yet, Masterworks has created a platform to allow anyone to participate. Sound kind of crazy? Not really.

Essentially, the company’s website makes it possible to buy an ownership share in a piece of artwork. Through fractional ownership, Masterworks makes it easy and affordable for investors to buy exposure within the art asset class.

Whether that means you should invest in fine art through Masterworks, however, is a different story.

Masterworks Review

Masterworks, which is based in New York city, has 17 employees and is backed by venture capital firm Loop Ventures. The founders have a mix of deep experience in both the art and tech worlds.

No doubt, investing in blue-chip art can be lots of fun. But it can also be profitable. Here’s how Loop Ventures’ Gene Munster explained it in a blog post:

“The art market has shown returns that are uncorrelated with traditional investment vehicles (0.10 or less for stocks, bonds, real estate and gold). According to Artprice, since 2000, blue-chip artwork has outperformed the S&P 500 by more than 180% (with dividend reinvestment), averaging 8.9% per year. We see Masterworks as part of the future of finance — offering investors easy access to unique investment vehicles with uncorrelated returns. The company’s founder, Scott Lynn, has a track record of building scalable technology businesses and a personal passion for art investing.”

Making this happen is no easy process, though. First of all, Masterworks reviews a database of over one million auction data records. The company has developed a proprietary system to select the optimal piece of artwork based on potential appreciation and risk factors. For example, what is the global collector base for the artist? Is there enough demand?

If everything looks good, Masterworks will purchase the piece of art – which happens every two months or so — and displays it in its own gallery in SoHo, New York (you can setup an appointment to visit it). The company also registers this investment with the Securities and Exchange Commission (SEC), which is done with a offering circular (it’s kind of like an initial public offering).

The goal is to hold onto it for three to five years. Then after it is sold, the shareholders will get a pro-rata share of the proceeds. As for the business model of Masterworks, the company takes a 1.5% annual management fee (this handles the costs for storage, gallery space, filings, insurance and audits) and a 20% commission on the profits.

Masterworks is also creating a bulletin board. This will allow investors to buy and sell shares from each other, which will provide more liquidity for the marketplace.

Should You Invest With Masterworks?

The global market for art sales is massive, with $67.4 billion in volume in 2018. Interestingly enough, a major source of demand has been from millennials. As for the online market, it came to about $6 billion in 2018.

Yet there are major risks with investing in artwork, such as with the reputation of the artist, the potential for fraud and the challenges for finding a buyer. In other words, this type of asset class should not represent a large portion of your portfolio.

Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence Basics, High-Profit IPO Strategies and All About Short Selling. He is also the founder of WebIPO, which was one of the first platforms for public offerings during the 1990s.  As of this writing, he did not hold a position in any of the aforementioned securities.