Bitcoin Is a Lot Like the Art MarketBloombergOpinion
(Bloomberg Opinion) -- Many people knew this was coming. Cryptocurrencies had one of the worst days in their short history on Wednesday. Bitcoin’s price careened, plunging 31% before recovering to a loss of about 10%. Ethereum, Dogecoin and Binance Coin all fell about 20%. The reasons why are still being sorted; crypto is a relatively new market and we don’t have much data to make sense of it all. But the crypto curious might find some guidance in another corner of the elite investment world: the contemporary art market. Cryptocurrencies and contemporary art are actually very similar commodities.
This week's market meltdown and ensuing rebound wasn't that surprising to crypto’s doubters. Its value never made sense to us. Gold, stocks, bonds and the dollar (which is backed by the goods and services of the U.S. economy) all have some intrinsic worth. They're subject to price fluctuations, too, but ultimately their price settles around something resembling the value of the company or government they represent.
Fans of cryptocurrency argue its value derives from the fact that it's scarce — there’s a limited supply of them (though maybe not that scarce, since it's relatively easy to start a new digital coin). But any asset that has no intrinsic value can always collapse in price, scarce or not, and even become worthless — remember Beanie Babies?
This also explains the dynamics of the contemporary art market, where scarcity and hype play a similar role.
The contemporary art market is the domain of new art works by living semi-famous or famous artists. Most of it is sold out of galleries. The dealers in the galleries take great pains to control prices, keep them secret and even manipulate them. New contemporary art will almost never be sold at auction, because then prices will be known and set in an open market. If a work does make it to auction (perhaps as a resale) dealers will sometimes participate in the auction to impact the price (and often blacklist the collector who sold a work so publicly). If you ask dealers why they do this, they’ll often tell you it’s to protect the artist. They must prevent the market for an artist's work from getting too hot. Their aim is to keep values rising, but stable, and that means dealers will sometimes step in to keep prices from rising too fast.
This is in some ways surprising — after all, dealers make more money when demand for an artist takes off. But much like in the market for cryptocurrencies, the value of contemporary art isn’t based on fundamentals (such as profitability or capital in stocks). There are some features that make a work of art valuable, like size or if it has a lot of the color red. But mostly, especially with emerging artists who may flame out, art has no objective intrinsic value. This means its prices are very fragile. If prices rise and then fall, collectors might suspect the artist was overvalued. In that case the market for their work could implode and the artist might never sell again. All it takes is one fickle collector to come along and hype one artist, then abandon them, to destroy a career.
The whole arrangement always felt icky to me. Dealers are manipulating prices in a market where they have a financial interest and it seems no good can come from that. But whether it's actually a problem comes down to one unanswerable question: Do art prices have no meaning because they are manipulated by dealers, or must dealers manipulate prices because contemporary art has no inherent value? Few people outside the art world care about the answer because there are bigger problems in the world than rich people paying too much for bad art pushed by a shady dealer.
What’s going on with cryptocurrencies in some ways justifies the dealers’ system. Much like art, crypto is essentially a speculative collectable. It will never be a viable currency in the non-criminal market as long as it's so volatile. As long as you need to convert it to dollars or euros to spend it, holding crypto exposes you to a lot of risk. Crypto’s desirability mostly comes down to speculation and the thrill of collecting something scarce. It's vulnerable to that one influential but fickle investor, as we saw when Tesla Inc. billionaire Elon Musk turned on Bitcoin this month because of its environmental impact, sending the price spiraling down. True to form, big Bitcoin investors talked up its value as it was crashing Wednesday and helped spur a rebound, and some bought in while prices fell.
There are so many similarities between the art and crypto market, it seems inevitable they would combine — and they did. This spring, collectors spent many millions of dollars on non-fungible tokens (NFTs), which use blockchain technology to sell digital art.
No one knows if crypto will still be a thing in 10 years; speculators may tire of an asset that is so risky and hard to predict. Crypto investors believe it's already become a mature asset class and the current gyrations are just a blip. But if the art world tells us anything, the only way crypto prices will ever stabilize (and not be subject to total collapse) would be if the exchanges practice some kind of manipulation, like art dealers do.
Of course, exchanges would run up against regulators if they tried such a thing. Unlike the rarified art market, there are small investors putting money into cryptocurrencies. Regulations around crypto are still in their infancy, but it's hard to imagine the Securities and Exchange Commission tolerating actors with financial gains at stake manipulating prices of publicly traded securities. So odds are crypto will always be a volatile asset class.
This means investors should think of their crypto assets the same way collectors think of their art acquisitions. It's fun to own and talk about them with other enthusiasts, but you’re never going to know if they're really worth anything.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Allison Schrager is a Bloomberg Opinion columnist. She is a senior fellow at the Manhattan Institute and author of "An Economist Walks Into a Brothel: And Other Unexpected Places to Understand Risk."
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