NFTs or traditional art: Which should you back in 2023?

Digital art’s rapid hype-to-crash investment trajectory is a far cry from the 'tireless uptrend' in the traditional art market

An artwork titled 'Bored Ape Yacht Club' at a gallery in London. The days of choosing a Bored Ape NFT over an Andy Warhol are probably long gone. EPA

Cast your mind back to 2020, when a global population of thumb-twiddlers were looking for something to occupy themselves with during Covid-19 lockdowns.

With cash to burn and excitement a priority, people flocked to invest in non-fungible tokens (NFTs) and, in turn, pushed the digital tokens into the mainstream.

Fast forward to 2022 and NFTs were barely a footnote in the cultural conversation, with monthly spending collapsing by about 90 per cent between March and November.

This, even as a chaotic global economy propelled traditional art investment to new heights.

So, as we head into a new year, it begs the question: What might 2023 look like for the two markets?

The key difference between NFTs and traditional art

To be clear, we are not sneery about NFTs. We are keen advocates for the technology behind them, but aren’t convinced by the current business models associated with them, nor their current use. However, time will probably change that.

When it comes to art, digital and physical art is not as far apart as traditionalists like to argue: they are both subjective, non-replicable works that are only as valuable as buyers decide.

Even British artist Damien Hirst has leaned into the overlap, offering collectors the choice of an NFT or physical version of his recent work The Currency.

Second, if we put aside the likes of Beeple’s Everydays: The First 5000 Days (which sold for $69 million in March 2021), the NFT market has got one thing very right: it democratised art investing in a world where it had been the preserve of the privileged few.

No matter what you think of NFTs’ cultural or investment potential, the idea that you shouldn’t need to own a private jet to buy into art sounds pretty appealing.

Watch: First text message to be sent will be auctioned as NFT

Still, there is one unignorable difference between the two markets: NFTs’ rapid hype-to-crash trajectory is a far cry from the traditional art market’s tireless uptrend.

NFTs’ hype-to-crash trajectory

The NFT boom could be put down to any number of things. Social media culture definitely bolstered the market, along with (ethically questionable) celebrity endorsements. Throw in pandemic-induced boredom and an influx of government stimulus, and the cryptocurrency market was awash with cash.

But at the heart of it, the reason for the hype was simple: it was an opportunity to make big money, fast.

Faster than stocks, faster than bonds and certainly faster than the art market.

Buy a Cryptopunk today, so the pitch went, and you will be a millionaire in next to no time.

That did not quite pan out. Cryptocurrency was arguably already facing economic headwinds at the start of 2022, but two scandals swiftly eradicated the world’s confidence in the digital rascals: the collapse of the “stablecoin” TerraUSD in May, and the bankruptcy of the third-biggest cryptocurrency exchange FTX in November.

Those caused Bitcoin to nearly halve in price from the start of 2022, and Ether to drop even further.

Sotheby's NFT art forum in Saudi Arabia — in pictures

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  Yuga Labs, 'Bored Ape Yacht Club 8817' (2021), one of the artworks displayed at Riyadh's first digital art forum last year. All photos: Sotheby’s

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  Ahaad Al Amoudi, 'The Mirage' (2021).

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  Pak, 'Fade' (2021).

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  Snowfro, 'Chromie Squiggle' (2021).

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  Tyler Hobbs, 'Fidenza 313' (2021).

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  Mad Dog Jones, 'Visor' (2021).

As for NFTs, the writing was on the wall when dedicated marketplace OpenSea laid off 20 per cent of its staff in July.

Today, there are about a third as many NFT buyers and sellers as there were at the peak in January 2022, and the tokens themselves are being minted around 60 per cent less often.

And there is the rub: NFTs’ short and choppy track record is the polar opposite of the long and successful performance of traditional art, which, according to years of data, has proved that it can hold up through times of war, high inflation and slowing growth.

You can see as much from Sotheby’s Mei Moses Index, which rose an average of 8.5 per cent every year between 1950 and 2021.

So, it stands to reason that physical art investing would have been in particular favour last year, and early data suggests it was. The total auction sales of old masters, impressionist, modern, post-war and contemporary art at Sotheby’s, Christie’s and Phillips hit $7.5 billion in 2022 — up by about 15 per cent from the year before, and a new record.

Which should you back in 2023?

Let us not be glossy-eyed here. Just because the art market had a stellar year in 2022 does not mean it will keep up the same pace.

Consider that a year of non-stop inflation, the war in Ukraine and the prospect of a sharp economic slowdown sent investors to alternatives such as art for returns and security.

But while we are not out of the woods yet, investors are a little more at ease than they were. That could usher them back to stocks and bonds at the expense of art as an investment.

You can’t entirely write off the NFT market, either.

Digital collectibles might have flamed out, but those with fan bases are still trying to diversify their intellectual property by creating products and building out entertainment franchises.

And keep in mind that Ethereum — the home of NFTs — has recently swapped an energy-intensive mining model for a greener staking alternative. That could drive usage of the platform up, and nudge investors towards giving NFTs a second chance.

Even if the NFT market makes an unlikely resurgence, the reality is the days of choosing a Bored Ape over an Andy Warhol are probably long gone.

Investors must remember that any ebbs and flows in the art market are features, not bugs, in the life cycle of any long-term art investment. The performance of all traditional asset classes in 2022 reflects that.

Andy Warhol's 'Shot Sage Blue Marilyn' at auction — in pictures

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  A woman takes a photo of Andy Warhol's 'Shot Sage Blue Marilyn' during Christie's 20th and 21st Century Art press preview at Christie's New York in New York City. AFP

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  Staffers work the phones for bids on 'Shot Sage Blue Marilyn' by Andy Warhol during an Evening Sale of works from The Collection of Thomas and Doris Amman at Christie's Auction House in New York. EPA

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  The 1964 painting 'Shot Sage Blue Marilyn' by Andy Warhol is carried in Christie's showroom in New York City, New York. AP

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  It sold for $195 million, the most expensive 20th-century artwork to sell at public auction. AP

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  Christie's auctioneer begins the auction of 'GE/Skull' by Andy Warhol and Jean-Michel Basquiat during an Evening Sale of works from The Collection of Thomas and Doris Amman at Christie's Auction House in New York. EPA

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  A woman takes a photo of Andy Warhol's 'Shot Sage Blue Marilyn' during Christie's 20th and 21st Century Art press preview at Christie's New York, New York. AFP

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  Media were given a sneak-peek as to what will go on the auction block. Reuters

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  Pop artist Andy Warhol all smiles in New York, New York in 1976. AP

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  Alex Rotter Christie's Chairman, 20th and 21st Century Art, introduces the 1964 painting 'Shot Sage Blue Marilyn' by Andy Warhol, to the media. EPA

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  Andy Warhol's 'Reigning Queens', 1985.

While the art market may have had a record-breaking year in 2022, ultimately the biggest takeaway was that high-quality, fresh-to-market artworks will fetch premium prices, no matter the wider economic climate.

Tamer Ozmen is chief executive of Mintus, an online art investment platform regulated by the Financial Conduct Authority in the UK and SEC in the US