Amazon is launching a digital asset enterprise soon, according to a recent report, focusing primarily on NFTs (non-fungible tokens) and blockchain gaming. This report turned some heads as the NFT craze of 2021 has died down significantly following the arrival of last year’s crypto bear market, leading some to wonder what motivated the e-comm giant’s decision.
Despite Amazon and other non-crypto companies showing interest in NFTs, a new form of blockchain art has already started gaining momentum: tokenized fine art. So what are the similarities and differences between tokenized art and NFTs, and how should retail investors approach them?
Comparing NFTs and tokenized art
Despite both typically leveraging blockchain technology (some platforms offer fractionalized shares of fine art off-chain), NFTs and tokenized art can be vastly different types of assets. NFTs can be any asset tokenized via blockchain using cryptography to ensure it cannot be replicated. While NFTs can represent any digital or real-world asset, digital artworks are the first widespread and most prevalent NFT use case. NFTs can represent a physical piece of art but more often than not, this is not the case.
Like NFTs, tokenized art is obviously tokenized via blockchain technology—although some is done off-chain. The difference is tokenized art always refers to a physical work that is fractionalized into multiple tokens, where each token can be sold off as a proportional share of the physical art work’s value. An NFT artwork is almost never fractionalized, and therefore employs singular ownership.
With thin lines of demarcation and plenty of overlap, the primary differences between NFT art and tokenized art are found in the commonality of the majority of their examples. NFT art is generally digitally created works where one wallet owns the entire piece. NFT artists typically employ styles and mediums that starkly contrast those used in traditional works of art. Tokenized art usually refers to traditional art mediums, such as paintings and sculptures, rather than digitally designed pieces, that are most commonly fractionalized on-chain for retail investors to purchase like they would a stock in a publicly-traded company.
In short, NFTs tend to be digitally produced art purchased by one unique owner while tokenized art is a physical piece of traditional art (usually) with shared ownership. With this simple differentiation in mind, what does it mean for retail investors?
What that means from a retail investor perspective
NFTs and tokenized art both leverage blockchain technology, providing the potential for investing in non-crypto digital assets.For retail investors, the motivations behind investing in an NFT or a tokenized piece of art define the difference between these two types of digital-art assets.
Tokenized art is generally viewed from a retail investor perspective as an entryway to a previously exclusive investment class. Fine art has historically been off limits to all but the ultra-wealthy, excluding the rest of society from benefiting from investing in blue-chip assets that have outperformed the S&P 500 over the last 25 years, serving a crucial hedge against inflation due to its detachment from wider financial markets.
For NFTs, the motivation may very well be to turn a profit, but that is rarely the prime motivating factor. When it comes to investment longevity, NFTs don’t have the proven track record of traditional art, let alone the security token status granted to some tokenized fine artwork. Therefore, the majority of individuals who purchase NFTs do so for a wide range of reasons. These could include anything from supporting an artist, membership within a community, bragging rights, or simply because it's a cool piece of art.
Retail investors should consider...
While NFT and tokenized art may seem similar on the surface, their main difference is in their value as an asset. NFT art is new, associated with crypto, and therefore volatile. Tokenized art carries the cachet of fine art and uses new technology to democratize access to a safe-haven asset class. When examining below the surface, retail investors will clearly find enough data to differentiate between the two.
Despite the differences, it ultimately comes down to the piece of art. Both NFT art and traditional art can go for millions of dollars on the open market. While the value of traditional art benefits from steady and consistent growth on a yearly basis, predicting the value of NFT art is much more challenging, and therefore not risk averse.