Art Market- How It Works
Demystify the art industry & finding parallel with the NFT market
I met a whale & a successful NFT founder, and let’s just say I was underwhelmed.
The NFT world works exactly — I mean, EXACTLY — like traditional art market.
I’m sure you’ve heard it before, but here’s how it works in the art industry (from what I’m seeing, this may be how the Beeple NFT worked too):
I, along with 9 other friends, buy 20 of Artist Nobody’s artwork over time, starting at $1,000, slowly increasing the purchase price over time to say, $10,000. Friend A submits one of Nobody’s artworks he owns for auction, I go buy it for $25MM. Friend A gives me back $25MM post auction; major news outlets report this amazing purchase, and all of a sudden, the 20 paintings we bought are worth $25MM each.
We just made $500MM (=$25MMx 20 paintings) out of thin air, and made an artist super famous.
When Nobody sells his painting for $15MM on the primary market, that painting is going to be snatched up because it’s at a large discount. Everyone knows he can flip that painting for $25MM at an auction somewhere. We have created liquidity for Nobody’s painting.
Assume now, my friends and I want to cash out on the $500MM. Since we have 20 paintings to sell, the market can’t digest all of them at the same time; given we paid next to nothing for them, we are willing to sell them at $10MM each, and we still made $200MM. Now the market price for Nobody’s painting is $10MM instead of $25MM. Everyone who bought & sold Nobody’s painting before this drop made money & are happy, but the last person who bought Nobody’s painting at $15MM has to either sell it for a loss or hold onto it, hoping for a bigger fool to show up.
This is what happens in a thin liquid, or rather, an illiquid market, where valuation basis is inconsistent.
Back to the beginning of this post — I was underwhelmed because I had high hopes for a utility NFT project, but left the meeting disappointed because all whales are the same…
You can definitely get into a hype NFT project and exit before the market crashes. But that does not help with introducing the blockchain and smart contract technologies to the mass market. Instead of chasing for the hype, I’m a strong believer that we will find more sustainable usage for NFT.
