The art market is a $1.7 trillion market that was only accessible to the ultra-wealthy. How many people can buy a painting for $3M? The art market has become accessible to the average investor with fractional ownership.
What is Fractional Art Ownership?
Before fractional ownership of art, an ultra-rich individual would buy a piece of contemporary art for $10M and flip it years later. A company might buy a painting, Andy Warhol's or Basquiat's. Then, offer fractional shares of the painting to the public. This allows the public to buy a fraction of ownership of a $10M painting.
After the fractional shares get purchased, a consumer has 2 options, hold or sell. Consumers can sell shares on the platform's secondary market for a profit. They will decide how many shares to sell and the price per share. There is no guarantee that the fractional shares will get sold.
Sale of Fine Art
Once a painting gets purchased, the goal is for someone else to buy the painting for more money. If a painting gets sold, shareholders will make money on the sale.
How to Value Fine Art
A painting might sell for $10M. Then, another painting by the same artist sells for $3M. Why? I went searching for answers.
An artist might have sold a painting for $6M in 2019. Then, in 2020 they sold a painting for $4M. If they sell a painting in 2021, the painting might sell for $4-7M because of the previous sales.
Potential investors might hear an artist's name in the news. Which might make potential investors interested in the artist's work. This might bring up the demand for the artist's work. The higher demand then, the more potential investors will pay.
Condition of the Art
There are pieces of art that have lasted 100 years. These pieces have value because they are in the same condition as 100 years ago. If a 100-year-old piece were to get damaged, then the piece would lose value. Any art that gets damaged will lose value. Art collectors do not want to buy a piece of art that has a guacamole stain on it.
Authenticity of Fine Art
Many people would want to steal a $10M painting. Some of those people might re-create the painting and try to sell it as the original. These copies might get mistaken for the original. If any art collectors bought a copy by mistake, then they would lose money. The value of art is that the piece is one of one, the only copy by the artist. If the piece is not authentic, then it has no value to the art world.
Secondary Market Fees
The platform needs to process credit cards to run a secondary marketplace. They need to charge a fee to process transactions.
The painting gets treated like an IPO. An entity needs to create shares and offer them to the public. The platform acts as the entity. They underwrite the IPO and add their fees into the IPO price. A $9M painting might have an IPO for $9.5M because the platform added their fees.
The platform handles everything for consumers. They acquire, store, and sell the painting. After the painting gets sold, they need to get compensated for the work. Operating expenses might get covered through the company's shares of the painting.
I have said it before, and I will say it again. If you are making a purchase on the internet, there is no avoiding a transaction fee.
The platform promotes the paintings and finds buyers. They charge for the service.
A consumer can only buy shares of a limited number of paintings. No one can buy shares of the Mona Lisa. But people can buy an entire original supremerumham, which is almost as good.
Many industries have formulas investors can use to determine the true value of an asset. This gives investors the ability to know if they are underpaying or overpaying. In art, these formulas are not common knowledge. If a consumer pays above the market price, the piece of art might not reach that price. They will lose money if the piece of art sells at market price.
Some platforms have two types of shares, voting, and non-voting. The non-voting share gets bought by consumers during an IPO. Buying non-voting shares means that they do not make decisions for the painting. For example, a painting has an offering of $5M. Then, a year later, someone offers $7M for the painting. The platform can sell the painting without consulting shareholders. Even if 51% of shareholders wanted to wait 6 months.
Some events want to look fancy. Expensive paintings will help the venue look fancy. The platform can offer their paintings to venues for their events for a fee. The revenue from the venue can get split between the platform and shareholders. The platform can offer its public storage area as a venue for events and charge for it. The events can act as a marketing opportunity for the paintings. Someone that attends the event might see a painting and want to buy it.
Reports on New Artists
Some people want to learn about new artists. But they do not know how to find them. A person that knows up-and-coming artists can write reports on them. They can sell reports to consumers.
Art Investment ETF
In equity markets, an ETF is a type of equity that tracks an index. A company buys shares of companies in an industry and sells the shares to the public at an average price. Artists have many paintings available to the public. One company can buy several paintings from one artist. Then, create an index and sell shares of the paintings. These art investment ETFs would act as an investment in the artist. If the artist sells their other paintings, the value of the paintings in the index will rise.
The platform stores the paintings for shareholders. They can buy cameras and create a virtual museum for the public. The public can buy tickets to view the fine art. The platform splits the ticket revenue with shareholders.
Is fractional ownership of art worth it? The ultra-wealthy buy fine art because they have nowhere else to put their money. All the other investment options get maxed out before buying the art. Someone might a painting for $10M. Then, sell it for $12M after two years. The buyer gets a return of 20%, not bad. But for the average person, the sale yields 10% a year. There are regular investments that have higher returns. Then, why invest in art if there are other options?
Other investment options might have an opportunity to earn income. In the stock market, some companies give dividends. For real estate, a homeowner can rent out their property. The art market does not have a method for investors to create income. Since art is reserved for the ultra-rich, they might not need to create income from art. Then, no one thought to create a method to earn income from art ownership.
The price of any fine art piece does not move overnight. Which prevents price manipulation by one moron on Twitter with 57M+ followers.
The internet has provided average consumers with opportunities. Opportunities they would not have had beforehand. One opportunity is fractional ownership of art.