Shaping the future market for digital art

Buying art in cryptocurrency has seen record-breaking prices followed by a crash in recent years, but there are ways to remove the volatility to benefit both artists and buyers

Dr David Challis, University of Melbourne

Dr David Challis

Published 13 June 2023

At the eye-catching price of $US69 million, the sale of the collage ‘Everydays – the first 5000 days in March 2021 was the first time many people encountered the digital art market.

The work is by graphic artist Mike Winkelmann – known as Beeple – who creates a new digital artwork every day, and was the first work of its kind to be sold by Christie’s auction house who declared him “among the top three most valuable living artists”.

The digital collage ‘Everydays – the first 5000 days’ by the artist Beeple sold for $US69 million in 2021. Picture: Shutterstock

While digital creative practices flourished with the proliferation of personal computers and the internet in the 1990s, their commercialisation only became viable with the appearance of Non-Fungible Tokens (NFTs) in the mid-2010s.

NFTs can take the form of digital works of art, animated GIFs, songs or gaming avatars, and may be one of a kind or one copy of many, like trading cards, where the blockchain keeps track of who has ownership of the file.

As unique digital representations of an asset, NFTs rely on blockchain technology to become permanent records of authenticity and ownership. This has made them a game changer in the attractiveness of digital art as a tradeable commodity and store of monetary value.

However, since mid-2022, art-related NFT sales have fallen considerably, prompting both artists and buyers to question the stability of the market. But detaching NFTs from the vagaries of the cryptocurrency market points to a way forward for both digital art and NFTs.

Ups and downs of the digital art market

According to the recently published Art Basel and UBS Global Art Market Report 2023 sales of collectible and art-related NFTs transacted through online platforms reached a remarkable $US13.3 billion in 2022.

Notably, all these sales occurred entirely outside the conventional art market channels of art galleries, dealers, and auction houses. They were also equal to a threatening 19.6 per cent of the $US67.8 billion of sales recorded in the traditional art market.

Bitcoin and Ethereum are distributed on the public blockchain network. Picture: Getty Images

However, this headline number conceals the fact that collectible and art-related NFT sales fell off a cliff from June 2022 onwards. Total sales in the second half of 2022 were only $US1.5 billion, which represents an 88 per cent fall for collectible NFTs and 75 per cent fall for art-related NFTs when compared to the previous six months., the prominent NFT data aggregator and the reference source for the above reports shows that activity in both sectors has fallen further in the first quarter of 2023.

This steep decline no doubt reflects a cooling in the demand for NFTs seen in the arts sector at the peak of the boom in late 2021. But structural factors have also been in play. Foremost has been the drop in Ether and other cryptocurrencies.

While NFTs are not technically denominated in any currency, they are typically traded and valued in the cryptocurrency of the blockchain they were minted on. Ether fell from $US4,651 in November 2021 to a low of $US993 in June 2022 before recovering to $US1,860 in May 2023.

Behind the decline in nfts

Since the vast majority of NFTs are minted in Ethereum and traded in Ether, explained the predominant cause of the fall in NFT sales values as an unavoidable result of the fall in Ether.

Another factor contributing to the drop in demand was that more than 80 per cent of the 2022 sales in collectible and art-related NFTs were resales of existing NFTs. This indicates a high degree of speculative trading that clearly disappeared once prices were thrown into reverse.

Non-Fungible Token works at an exhibition entitled ‘Indo NFT Festiverse’ at the Indonesian Art University. Picture: Getty Images

High-profile insolvencies, including Terraform Labs in May 2022 and FTX in November 2022, also played a role in destabilising confidence in the decentralised finance sector. This has no doubt been compounded by the mixture of legal, tax and regulatory issues circulating around trading activities relating to crypto assets.

Where to next for collectible and art-related nfts?

According to ‘the era of NFTs where speculation and profit reigned supreme is probably over’.

Recent performance supports this sentiment, although a return of Ether to its previous highs, which is entirely possible given its price volatility, would almost certainly flow onto NFT prices and reignite speculative demand.

But thinks a more likely future outcome is one where ‘the usefulness of tokens takes precedence over the notion of financial investment’.

This statement is supported by their third quarter 2022 report where both art-related and utility-related NFTs doubled their market share at the expense of collectible, metaverse and gaming NFTs.

The ‘usefulness’ of NFTs is certainly more closely aligned with their originally intended purpose.

Their potential to securely document and track ownership of digital assets makes them an indispensable component of the productivity uplift promised by blockchain technology in sectors like real estate, manufacturing, supply chains and payment systems.

Few serious artists or art collectors welcome the idea of their artworks being exposed to a volatile and speculative market environment. Picture: Getty Images

Using local currency to increase demand for nfts

Detaching the pricing and valuation of art-related NFTs from cryptocurrencies may also elevate their functionality. Traditional art collectors that have little interest in the volatility and added complexity of buying art in cryptocurrency are unlikely to buy digital art in this form.

To address this, many digital art galleries currently offer on and off-ramping that allow collectors the option to buy and sell NFTs in local currency.

However, these payments are quickly converted to the relevant cryptocurrency before acquiring the respective NFT meaning purchases, sales and valuations are still cryptocurrency dependent.

Web3 purists would recommend simply offering NFTs in a stablecoin that tracked the local currency. But making art-related NFTs available through the local payments system would detach the NFT from the cryptocurrency market altogether.

Melbourne-based crypto exchange Elbaite has a patent pending on a methodology that makes this possible. By monitoring a given blockchain for the exchange of a conforming NFT, Elbaite can trigger a transfer of local currency through the existing payment system.

Art-related NFTs traded exclusively in this manner would effectively detach their settlements and valuations from the vagaries of the cryptocurrency market.

Few serious artists or art collectors welcome the idea of their artworks being exposed to a volatile and speculative market environment. Offering the potential to buy and sell in a local currency would remove one of the significant hurdles currently impeding demand for art-related NFTs.

Banner: Getty Images

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