Asset Class Insight Series: Comparing Art and Cryptocurrency

Several Masterworks investors have asked us to compare art and cryptocurrency from an investment standpoint. While interest in cryptocurrencies has increased over the past decade, so has interest in art from an investment perspective and now through Masterworks, investing in art has become more accessible to the broader investor community.

But, how do the investment properties of cryptocurrency compare to those of blue-chip and established artwork? Here, we breakdown a few key differences and similarities:

Difference #1: Market Size

Astonishingly, the aggregate market cap of cryptocurrencies is remarkably small: a total of $195 billion across the top 100 currencies.

Comparatively, art collectors hold more than $1.7 trillion in art assets or roughly 6% of their global net worth and nearly 9 times the size of the entire crypto market. This makes art among the largest, frontier asset classes there is.

Difference #2: Art is not a HODL Asset

The liquidity in BTC comes with a comes a punishing level of volatility – hence the rallying cry to HODL among crypto investors, or “Hold on for Dear Life”.  By contrast, art is a long-term asset bearing a far lower level of volatility.

Since 2010, contemporary art had an annual standard deviation in returns of 6% as compared to over 1700% for BTC.

Difference #3: Art is a Real, Real Asset

The final difference is perhaps the most obvious. At its core, BTC a “digital asset” existing purely within a distributed ledger in servers across the planet.

Art is a physical asset and, put more finely, it is the quintessential “treasure” asset. You can handle it, move it, store it or hang it in a museum. Importantly, art can be readily insured against physical loss, theft or damage.

The combination of its physicality and its mobility is a powerful combination and what sets it apart from luxury real estate or even many precious metals in terms of investment. 

Similarity #1: Scarcity in Supply

The supply of Bitcoin (BTC) is fixed at 21 million coins, of which roughly 85% is believed to have been mined. 

However, artwork by blue-chip and established artists generates an increasing scarcity value over time due to the contintually declining supply of available material in the market.

Deceased artists (goes without saying) do not produce additional work, and even many living artists control their output to create scarcity value among collectors and investors. Moreover, the acquisition of artwork by public institutions effectively takes artwork “out of circulation”, as institutions display the works in their permanent collections and do not intend to resell them. Hence, the fixed – or potentially decreasing – supply of such artworks causes their value to appreciate as demand increases – demand being principally driven by purchasing power growth among the global ultra-high-net-worth community.

Similarity #2: Low Correlation

Neither BTC nor blue-chip artwork is directly linked to a cash flow in the same way financial assets are. Neither has an EPS, terminal value, dividend yield, credit rating, nor any other economic “fundamental” that might be used in any traditional corporate finance context. 

What this means is that both cryptocurrencies and art tend to behave very differently when compared to financial assets (e.g., stocks, bonds, etc). Over longer periods, both can be said to be weakly correlated assets in this respect. Low correlations (typically below 0.5-0.6) mean returns between two assets do not tend to move in concert with one another.

However, annual returns in contemporary art has exhibited a lower correlation to global stock with a correlation factor of negative (0.32) since 2010, while BTC had a correlation factor of 0.45. Contemporary art and BTC are similarly weakly correlated with one another with only a 0.16 correlation factor. 

Similarity #3: Global Assets

Both cryptocurrencies and art are clearly global assets – transacted and owed around the world by a range of different investor types.

Over 60% of global art assets are held outside of North America. Art transcends the boundaries of traditional fiat currencies (e.g. dollars, sterling, euros, yen, etc) and can be bought and sold in a vast array of “exchanges” across the globe.

And, for the art market, the COVID-19 crisis may only be ushering a new era of digital-based art sales channels that could render live auctions to the dustbin of history.

 

Despite the differences, there is much that crypto investors can relate to in art as an investable asset class. And likewise, there is much that investors in the very “newest” asset class can learn and gain from investing one of the oldest asset classes there is. 

Stay tuned as we continue this asset class comparison series… 

 


 

Sources:
1. Contemporary art performance based on internal Masterworks analysis based on repeat sale regression (3-stage generalized least squares method)
2. Deloitte Art and Finance Report
3. Coinbase. Coinmarketcap.com

 

Share: