Digital art: how NFTs have become a new asset class

NFTs were undeniably the stars of the latest speculative fever to hit the market in 2021. Hundreds of collections then emerged in shambles, sometimes trading for several million euros with investors believing in a new El Dorado.

"It was easy to imagine being the next Picasso. Even with a collection generated in a hurry, it was possible to make a lot of money," slips an investor in the sector.

"For the first time, NFTs enabled artists to have a global audience. This is largely what explains the speculative frenzy we witnessed in 2021," remarks Sebastian Sanchez, Manager Digital Art at Christie's auction house.

But with the bubble having since subsided, almost all art-focused NFTs are now worth very little. "The spectacular rise in prices has created a lot of misunderstanding and hurt the market overall," confides a collector of traditional contemporary art who has committed to the NFT segment.

Yet, at the heart of the speculative madness, one event has changed many things. In March 2021, Christie's auction house sold "Everyday: The First 5,000 Days" for $69.3 million.

This natively digital painting is the work of Beeple, whose real name is Mike Winkelmann. Unknown at the time, this American artist is nevertheless with this first sale entering the trio of the most expensive artists in the world during their lifetime, just behind David Hockney and Jeff Koons.

"Even though this market went through a kind of desert for two years, this sale showed that digital art has a future and the characteristics to structure itself. Things are also picking up these last few months," explains Sebastian Sanchez.

Emerging selection criteria

So how do you identify the value of an NFT? That's what Grail Capital, an investment fund dedicated to the subject launched just over a year ago by Jean-Michel Pailhon*, is trying to determine.

"In the middle of the desert, around twenty collections have begun to be validated by the major institutions in the art world, who have confirmed their cultural and therefore economic value. It's also interesting to note that NFTs are adopting the codes of a traditional asset class", explains this former Ledger executive, an NFT collector from the outset. In fact, the Centre Pompidou announced the acquisition of a CryptoPunks in February last year.

Grail Capital is trying to propose a kind of taxonomy, i.e. the act of classifying, to observe the market. Among the collections that have emerged and made their mark are, alongside the iconic CryptoPunks, Ringers and Fidenza. Trends have also emerged such as Generative Art, IA Art and Digital Painting, a category to which Beeple's flagship work belongs.

"In the art market, the way a work is conceived helps determine its value. Digital technology allows new ones to emerge. Beeple's work, for example, was created entirely using a computer with a precise concept specific to the artist, which helps to give it a value," analyses Sebastian Sanchez.

"It's funny to note that in the wake of the emergence of artificial intelligence, AI Art has also seen a major explosion. Software such as Midjourney has enabled anyone to generate images and make NFTs out of them," explains Jean-Michel Pailhon. "However, the most popular artists in the field are those who produced works using artificial intelligence before the trend, such as Robbie Barrat. CryptoPunks also launched before the big trend of 2021," he adds.

"As in traditional contemporary art, some artists ask us to design technological tools that will enable them to express their art in the best possible way by creating a kind of personalized Midjourney," explains an IT developer.

Some artists have also seen a new concept to exploit with the emergence of Ordinals on bitcoin (read our article on the subject), which enable NFTs to be created on the first of the blockchains by numbering the satoshis that make up a bitcoin.

"What attracts them is the new concept of rarity enabled by this numbering," explains Romain Nouzareth, CEO of Sato Technology, a bitcoin mining company that supported Japanese artist Takeru Amano for the launch of his "Magic Eden" collection.

A "generational affair"

"Today, the majority of NFT buyers are under 40 and work in Tech," explains Sebastian Sanchez. "The traditional art world is still a long way from taking an interest," he adds.

However, the Digital Art Manager at Christie's believes that the normalisation of NFTs as works of art is inevitable. "It's a matter of a generation that has grown up with Internet reflexes and its own codes. I would say that it will be another ten years or so before this happens," he anticipates.

"The market still bears the scars caused by the bad reputation stemming from the last phase of speculation. As it is a very young market, it is also difficult to have sufficient hindsight to visualise with any certainty what it will look like in the near future", notes Jean-Michel Pailhon. "The big question is whether, in 10 years' time, someone who has made a fortune will opt for a Warhol or a CryptoPunks. At Grail Capital, we are leaning towards the second option," he concludes.

To develop, digital art also needs legal clarification. Last week, for the first time, the tax authorities provided clarification on the taxation of NFTs, which they are tending to model on the existing taxation of works of art.

"As far as contracts and property rights are concerned, existing law logically applies in the vast majority of cases. You just need to study the technical specifics carefully to determine your rights properly", explains Ronan Journaud, a lawyer specialising in tax law.

** Jean-Michel Pailhon is an individual minority shareholder in The Big Whale*