A token is a crypto asset that works as a digital representation of some good or service. In the financial sector, those goods and services that have value are called “assets”.
These assets can be many things, and among them are works of art such as paintings, photographs and digital art. These tokens backed by these artworks are called artwork tokens.
In this case, the token represents total or fractional ownership of that work . Thus, whoever owns this token also has the right to be remunerated when that piece is sold to a collector.
Therefore, we can say that buying art tokens is an alternative way to invest in the art market, with more practicality and a much lower investment cost, since the asset price can be divided into smaller parts represented by the tokens.
How to tokenize an artwork?
The process of turning works of art into digital assets is called tokenization.
This process is done by registering that work on the Blockchain , a public and virtual ledger. This is the same technology that guarantees the security of cryptocurrency operations.
When registered, the tokens digitally represent ownership of the artwork and can be purchased by investors.
The represented property can be integral, represented by a single token, or divided into fractions, in several tokens. These tokens are sold to investors, who will later receive the proportional income resulting from the sale of that work.
The token that represents the work in its entirety is called a non-fungible token (NFT) and can be quickly created from NFT marketplaces .
Fractional works of art tokens, on the other hand, function as semi-fungible tokens, which can be distributed to different investors through quotas, at a lower and more accessible price.
Differences between semi-fungible token and NFT
At this point, it is important to differentiate between investing in semi-fungible artwork tokens and non-fungible tokens (NFTs).
Non-fungible Tokens (NFTs)
Fungible tokens are those easily interchangeable between other tokens of the same kind. NFTs (non-fungible tokens) are proprietary, encrypted, and unique virtual certificates .
Thus, while a fungible good can be replaced by the same good of equal quality in the same quantity, a non-fungible good is unique, exclusive and irreplaceable.
So, whoever buys an NFT is also buying the property right over the exclusive item that the non-fungible token represents in its entirety.
Semi-fungible tokens combine characteristics of both fungible tokens and cryptocurrencies, such as Bitcoin and Ether, and characteristics of non-fungible tokens.
This is because unlike the NFT, which is an exclusive token, in this type of operation the certificate of ownership of the work of art is divided into different smaller parts, that is, into different tokens.
For example, a work worth R$100,000 can be divided into 100 tokens of R$1,000 each or even a thousand tokens of R$100 each. In this way, each of these tokens has the same value as the other tokens of that same work of art.
However, these tokens are still not considered fungible, because they cannot be exchanged for other cryptoassets and because they lose value when the work is sold to a collector and the profit is redeemed by investors.
Difference between investing in artwork tokens and buying NFTs
As a result of the characteristics just mentioned, one of the main differences between investing in artwork tokens and buying NFTs is the cost of accessing these two types of investment.
The NFT is purchased for the full price of the artwork it represents. But as semi-fungible tokens can be distributed in different fractions to a larger number of people, it is possible to buy them in smaller quotas.
In this way, fractional tokens make it possible for works by recognized artists to remain more accessible. This provides a promising investment alternative for a larger portion of the population and facilitates entry into the art market.
How does the art market work?
The art market is already old and traditionally fed by a richer part of the population. Buyers are motivated by many reasons, be they aesthetic, social or purely profitable.
Investing in works of art is possible from the moment that there is value in an artist’s work. The negotiation of its pieces follows the laws of supply and demand, created within an ecosystem composed of artists, museums, galleries and collectors.
Why does a work of art have value?
The value of a work of art can increase over time as the artist becomes more recognized and his work becomes relevant, which attracts demand from collectors.
Some factors that contribute to this appreciation are the degree of cultural relevance of the author and his interaction with the market. Participation in important exhibitions and contact with major galleries are some examples.
After the artist’s death, the price of his works may remain the same or continue to increase while the supply of his work decreases, as a limited number of his pieces are available on the market, maintained by museums and disputed by collectors.
How investing in artwork tokens works
Investing in artwork tokens is an alternative investment type. This means that this is not a product offered by banks and brokerages in the traditional market. Find out now how this modality works:
Evaluation and pricing of works
Before the start of each operation, professional appraisers study and price each work made available for investment, based on in-depth analysis of the artist, the work and the sale of other similar works.
Evaluation and conservation reports are generated and the works with the best market value and the greatest potential for appreciation are selected to assemble the operation’s catalogue.
Token launch and sale
After the launch of the tokens, investors who buy the artwork tokens become co-owners of the collection that makes up the catalogue.
After starting the operation, the works start to receive purchase offers from interested collectors to be sold. The collector will be buying the NFT of that work and the profits will be proportionally passed on to the investors who bought the tokens of the work of art.
The operation ends when all the works are sold, the tokens burned and the profits passed on to investors.
Income from artwork tokens
There is a particularity about the yield of these tokens. As the Works of Art are sold, the value generated by the sale is distributed to investors, after deducting the transaction costs, thus generating cash flows.
Is it worth investing in artwork tokens?
Remember that what defines whether or not a type of investment is worthwhile for you is your investor profile . Therefore, before evaluating the advantages and risks of an investment, first do a self-analysis of your personality and goals.
If you are interested in investing in artwork tokens, calmly study the advantages and risks involved in the operation:
- Scarcity and potential for appreciation: A work tends to increase in value as the artist adds cultural recognition to his work and articulates himself in the art market. Even after the artist’s death, his legacy and the limited supply of works mean that prices remain unchanged or increase even more, while they are withdrawn from circulation and acquired by collectors and museums.
- Diversification with uncorrelated assets: The art market has low correlation with the stock exchange and other markets. This feature makes artwork tokens an interesting alternative for diversification, especially in times of political-economic uncertainty and greater volatility.
- Access to the art market: Tokenizing artwork allows you to invest in art at a much lower upfront cost. This facilitates the access of more people to a market that until then was restricted to a small group of investors with more capital, creating new investment opportunities.
Investing in works of art tokens presents the risks inherent to any investment in variable income. Therefore, it is not possible to predict the exact profit or rule out the chances of capital loss.
In addition, you need to consider:
- Subjective value of art: the value that each person gives to art is subjective and even specialists tend to differ on the analysis of the quality and prices of a work.
- Liquidity: the sale of a work may take longer than expected to be completed, causing delays in the transfer of amounts to investors.
- Physical damage: A token is not the work of art itself, but its value is tied to it. Therefore, when investing in art, one must consider the risk of possible physical damage, loss, or natural disasters that may affect the integrity of the work.