Nothing quite as bougie as showing off an art collection. Even if you don’t fully understand or even like art, it’s a classic marker of the rich. But for real, why do rich people invest in art so much?
Diversification, scarcity, clout, tax advantages.
Invest in Art for Diversification
The investable art market is worth around $1.7 trillion. For comparison, the aggregate market cap of the S&P 500 is around $31 trillion. It’s a tougher market to value because of subjectivity, illiquidity, and asymmetry of access (which is part of the reason for its liquidity). Unlike share of stock or a Bitcoin wallet, this is an investment you can hang on your wall and show off to others without being gauche.
Rich people have a greater preference for classic rich-people investments (e.g. luxury cars, art, wine). These types of investments can earn healthy returns (with historical appreciation greater than the S&P500 according to Masterworks).
But art—unlike wine, whisky, or cars—won’t depreciate as you use it.
Art is Inherently Scarce
For any traditional art, there’s only one of a kind. It’s not really about the image or sculpture or whatever, but the originality and uniqueness. If it were about the actual appearance of the art, a really really good replica should be nearly worth as much as the original.
But it’s not.
Art value is driven by the story of its creation, not how pretty the picture is. For example, if someone painted the Arnolfini Wedding today, it wouldn’t matter. But the original painting matters because of what the painting meant at the time of its creation.
Banksy’s art isn’t honestly that great when it comes to it it. The guy (girl? group?) is certainly talented. I can’t recreate the kind of craft they’ve generated. But I still think it’s decently mediocre “capitalism bad” tripe.
But still, nice graffiti art.
What gives it value then? Why is it getting auctioned off at Christie’s for millions? Because everyone thinks everyone else is impressed by it.
Yes, there’s a fair bit of BS in the art world. That’s just part of the game.
This is (partly) why NFTs are Still Hanging On
NFT stands for non-fungibe token. Most crypto is fungible because that’s how it can be used as money. An NFT is built on top of Ethereum and creates something non-fungible on purpose.
The way an NFT is generated means you can “tokenize” anything you want, like an image, a URL, text, whatever. If someone buys your NFT, they’re not buying the image, text, or whatever, but the NFT for it. Why would anyone do this? Good question.
In general, it’s pretty dumb. However, you can muster legitimate uses for it if say in a legal contract for example “whoever owns this NFT has the legal right to distribute this image/own this house/receive this annual payment” or whatnot. It has potential in the future as an interesting way to transfer rights. However, in the digital art world, its main function is scarcity.
When someone creates an NFT, the creator determines how many of those tokens (or amounts of that NFT) to issue. It can be 1, 10, 100, etc. You make more if you want to sell more. You issue fewer if you want them to have greater scarcity.
If you’re a superfan of an artist or influencer and they do a one-off NFT issuance to launch their new album, you could be one of 10 people to own their NFT. It’s not exactly a way to invest in art, though some people try to convince themselves it is.
It’s a new type of merch.
Invest in Art? Invest in Clout.
People who are into crypto are often REALLY into crypto. People don’t like to share how much of a cryptocurrency they own as it’s considered a bit of a faux pas. You also don’t ask.
Speaking of NFTs, this is probably the main reason they still art doing (decently) well at the time of writing.
The Right Pieces = Clout
One way you can flex is by buying an NFT. For some reason, it’s not considered gauche to announce you own an NFT. It’s like you’re showing off normal art in your gallery. Except everyone knows how much you paid for it because everything was public (which was kind of the point).
NFTs as art are lowkey a bubble, and most people are relying on the next greater fool to buy it from them. The ones who aren’t trying to flip an NFT are the people buying it inherently as a flex. It’s the digital version of buying Dom Perignon and spraying it on each other in the hotel pool.
NFTs will very likely become a mainstream financial tool in 10 years for things like mortgage titling, and other forms of unique ownership. For now, as Gary Vaynerchuk says, 98% of NFTs will likely lose their value (aside from some top-tier digital artists’ work).
Disgusting Tax Advantages (in a Good Way)
The clever way to invest in art is when you buy a set of pieces strategically to throw a middle finger to taxes.
This is the fun part. So you know how, when you make a donation, you can write it off on your taxes? Here’s an idea:
- Buy 5 pieces from one artist’s collection (let’s say $1,000 each)
- Wait a year and give one away to a museum. Make sure they value it much higher. We’ll say $10,000.
- Now all your other paintings are worth ~10k each and you get to write off 10k on your taxes.
You’ve turned a $5k investment into $40k in wealth retained while also writing $10k off on your taxable income that year.
If you want to know more about it, Adam Ruins Everything gives a fun overview of this idea (and more shady art world practices).
Invest in Art to Keep and Grow Your Money
Invest in art if you can afford to (AKA it’s not your entire portfolio and you don’t mind holding an illiquid investment). I did—though I did for the actual artistic value. I don’t plan to sell my painting.
If you’re rich enough to buy an actual collection from an artist—you’re in the tax-advantaged game.