NFT Investing: Fractional Art Platform CEO Warns of “Pure Speculation”

Scott Lynn has been getting lots of questions about non-fungible tokens (NFTs) these days.

After the digital artist Mike Winkelmann, also known as Beeple, sold a piece of digital artwork called “Everydays” for $69 million at the 254-year-old Christie’s auction house, several artists that Lynn works with started the process of creating NFTs due to the run-up in prices.

Lynn is the founder and chief executive of Masterworks.io, the first platform to allow investors to buy and trade fractional shares of blue chip art.

A serial entrepreneur, he has built companies including the internet gaming site Treeloot.com, digital advertising firm Adknowledge, and fintech company Payability. 

NFTs — speculative bet or innovation

Despite his tech background, Lynn said he thinks of NFTs more as a way to make a speculative bet than investing in a culturally significant artwork.

“To us, it feels like pure financial speculation,” he said in an interview. 

Lynn said his views of NFTs may evolve as more culturally significant artists create NFTs, but right now he remains skeptical for two main reasons. 

One is that the current boom seems to be fueled by crypto investors who are putting the huge gains they’ve made in bitcoin and other cryptocurrencies to work. 

After a soaring year that saw bitcoin break above its previous record to reach $61,000 over the past weekend before pulling back to around $55,000 as of Wednesday afternoon, investors are sitting on massive gains and looking to deploy newly minted riches. 

“There are now more than 100,000 bitcoin wallets with $1 million or more in BTC,” Lynn said. “The Singaporean-based buyer of Beeple is well known as an early and major player in bitcoin.”

He also suspects that the so-called scarcity value of NFTs appears somewhat “manufactured.”

In his view, a rare piece of artwork such as Leonardo da Vinci’s “Mona Lisa” denotes true scarcity, whereas NFTs create artificial scarcity for an object like a digital image that is already available to anyone so that only one person can prove ownership of it.

To be sure, NFTs have proved to be extremely lucrative investments for some collectors. Edward Fairchild, who had bought a Beeple NFT art piece for $969, recently saw similar works being sold for at least $289,000 and is hoping to sell the piece he owns for $1 million in profit. 

In addition to art, NFTs can also be adapted for use in a wide variety of industries including gaming, finance, and real estate. For example, billionaire Mark Cuban told Insider that the Dallas Mavericks could use NFTs for ticketing in order to capture a portion of ticket resales, or even use the “smart contracts” features of the tokens to offer perks.

Fine art investing for the masses 

While Lynn struggles to see NFTs as a strategic asset class in an investor’s portfolio, he is bullish about the inflation-hedging, uncorrelated qualities of traditional artworks.

An art collector since the age of 20, Lynn has grown his collection to include famed artists such as Willem de Kooning and Jackson Pollock, and lent works to MoMA, The Guggenheim, and many more museums across the globe.

But it is the high risk-adjusted returns of contemporary art that incentivized him to set up Masterworks.io where investors can buy fractional shares of iconic paintings created by legendary artists such as Pablo Picasso, Andy Warhol, and Banksy. 

According to the firm’s research, contemporary art, or post-WWII works, have returned 13.6% per year versus the S&P’s 8.9% since 1995.  Art also has a low correlation rate of 0.02 to the S&P 500 and a low loss rate, which measures the frequencies with which losses are incurred, of just 4% in a 3-year rolling period, its data shows. 

On top of that, the prices of contemporary art have been found to be inversely correlated to real interest rates. In Lynn’s view, all these characteristics make art a diversifying, inflation-hedging, and return-enhancing alternative asset class in a low-interest-rate environment. 

In fact, outside of his tech startups, Lynn said he has made higher returns on investing in art than anything else, but unsurprisingly, the $1.7 trillion market has been historically dominated by the ultra-wealthy.

“If you think about an ultra-high-net-worth person purchasing a $10 million Monet, when they go to sell that Monet, it’s just very unlikely that that painting re-sells for $5 million,” Lynn said. “We don’t really ever see it happen in the art market.”

Since its inception in 2017, Masterworks has attracted over 131,000 investors onto its platform and 4,000 users have set up trading accounts to buy and sell shares. 

The risks of investing in fine art 

Like any alternative asset class, investing in fine art comes with its unique risks, which tend to be inversely related to what drives the prices of artworks. 

One of the drivers is scarcity. The finite number of paintings that an artist is able to create in their life makes it so that prices tend to move up over time. 

“Since the number of paintings and an artist’s body of work declines over time, that does tend to support increased prices over time,” Lynn said. However, if there is an oversupply of artworks from particular artists, that could weigh on the value of the paintings. 

The prices of artworks are also correlated to growth in the top 1% population on a global basis, according to Lynn.

“As the top 1% globally gets wealthier, we think there’s a correlation that causes art prices to go up,” he said. “So when we think about the risks to investing in art, generally we tend to think about things like wealth taxes or art-specific taxes that target the collector base around the globe.”