Priscila has a few things that make her special. Purple lipstick, messy black hair, a mole the size of her pupils. They’re the kind of features that make her valuable as one of the 10,000 collectible non-fungible tokens called CryptoPunks generated by the tech-art group Larva Labs. This past summer, the Institute for Contemporary Art Miami announced that it would acquire the work as part of its permanent collection, saying that NFT works are “truly representative of the cultural zeitgeist and will have historic significance for generations to come.”
But six months later, the work is stuck in escrow. While other such CryptoPunks have traded for millions of dollars on NFT exchanges, ICA Miami is left waiting for professional appraisers to settle on the work’s dollar amount, both in case it gets destroyed, and so the donor, a trustee, gets a tax break.
The museum’s experience is representative of the collision of a hype machine that’s pumped up NFTs to more than a $40 billion industry with the staid apparatus of insurance companies, tax professionals, and museums that have decided what works of art are worth for hundreds of years. Appraisers and insurance companies are only starting to grapple with the question of what are NFTs actually worth? Unlike traditional works of art, NFT values are pegged to cryptocurrencies that rapidly fluctuate in price. The market has also been rife with fraud and stolen works.
NFTs aren’t themselves art, but are a way to show that someone owns a digital work that can otherwise be replicated, just as anyone can buy a poster of the Mona Lisa that hangs in the Louvre. They were largely seen as a tech gimmick in the art world up until last year, when the digital artist Beeple sold a collage of digital photographs for $69.3 million through Christie’s to crypto investor Vignesh Sundaresan. Since then, celebrity artists such as Damien Hirst have started selling paintings as NFTs, giving buyers a choice to keep the digital version, in which case the painting will be destroyed, or the analog version, which will lead to the deletion of the NFT. But it isn’t all art-world superstars, either. Lesser-known artists can sell directly to their fans and then get a 10 percent cut of each sale of the NFT after that. “Instead of posting to Instagram all of my images for free, not making a living on being viewed or noticed, NFTs guarantee you money for your stuff being consumed,” the animator Oliv Roe told me.
And for professional art dealers, NFTs are a way to get access to younger buyers who have eluded them. “The reason we were trying to be excited about it is because for years we’ve been trying to get into this new generation,” one executive at a major fine-art dealer told me. “If you live in a box with more windows than walls and you can’t hang a picture, you can keep your NFT collection on a thumb drive. That’s why the big players here jumped onto it, because it’s the only way they can attract interest from people in their 20s and 30s — which is really sad, and is a massive admission of defeat.”
For years, the art markets have operated behind closed doors through a complicated network of collectors, dealers, galleries, and museums who guard art prices from all but a select group of professionals. Unlike something like the stock market, where the values of companies changing hands are publicly broadcast on an exchange, there are no such expectations for transparency. “The art world feels very sexy to people because it is secretive,” Esther Kim Varet, the owner of the L.A. and Seoul gallery Various Small Fires, said at a panel discussion at Art Basel. “There are a lot of barriers and it feels exclusive once you get in. And I fear that the more pricing transparency there is … we’re going to have to invent new ways to create this aura of exclusivity or privilege. Not that those things are things that we should value but it’s just kind of what the art world is built on.”
What makes NFTs so novel is that they’re bought and sold through exchanges, so anyone can see the last transaction. For instance, one of the most popular collections of NFT art are the Bored Apes, a group of 10,000 cartoons with randomly generated features (sunglasses, a hat) that help determine their value. As I write this, the cheapest one is worth more than a quarter-million dollars, though they can trade for upwards of $2 million, with those prices determined by the trade data on exchanges like OpenSea. While no artist is immune to fads and changing tastes, the rapid run-up in publicly broadcasted prices has had a dizzying effect on the art market.
When a museum accepts a work of art as a donation, it’s much more complicated than taking a check. In the United States, the IRS requires any institution to get an independent valuation, which determines the tax breaks for the donor. When it comes to traditional artworks, appraisers usually value them once a year or less, often for insurance purposes, judging them against an established collection of similar works. With NFT art, there’s much less to go on — and that has spawned a new arms race for appraisers to come up with ways to clearly and soberly determine its value. “The insurance market for fine art is very deep,” said Caroline Taylor, founder of Appraisal Bureau, which values NFT art pieces, including Priscila. “The retail replacement value is often much higher than fair market with good cause, and the industry can afford that. Whereas, with NFTs, it’s in its complete infancy,” she said.
Taylor has come up with a proprietary methodology to price NFTs, which she agreed only to describe generally, that factors in an average price of the blockchain that an NFT is minted on, as well as the value of similar works, and how it could be used. Lloyd’s of London started using this methodology to write insurance policies on NFT art, and because insurers have to determine how much they would have to pay out if a volatile digital currency is lost or destroyed, her method automatically calculates the value on a daily basis.
The problem, however, is that not all those sales can be trusted as genuine — and the difference between a real price and a sham one can be vast. Crypto markets have been hounded by accusations of fake trading to boost prices, and one CryptoPunk was allegedly inflated to more than $500 million in a shady transaction. Taylor said she’s aware of these kinds of issues in the market, and is taking unspecified protective measures against them.
Museums also have to worry about new ways to store NFTs — as hacking and scamming have become an increasing problem, with a record $14 billion stolen last year. “People are talking endlessly about NFTs. People are interested in it, which means that it’s an attractive target for threat,” said Alex Gartenfeld, ICA Miami’s artistic director. “If something is hosted on a platform, even if it’s cryptocurrency, and tomorrow that cryptocurrency is gone, then a lot of value is lost.” Taylor’s company is also working with security company Malca Amit to safely store the NFTs physically. The digital assets will be stored on disconnected hard drives in one of its vaults — their largest, in London, is the size of three tennis courts and also holds gold bullion and diamonds — and owners won’t be able to sell their digital asset without retrieving it in person, explained Charles Turner, an executive at the security company.
Still, the largest institutions are only moving so fast in their embrace of NFT art. Almost the entirety of Art Basel’s floor space this past December was devoted to traditional media, and some of the art world’s most recognized authorities on valuation want to wait before jumping into the crypto works. “I’m super cautious,” Roman Kräussl, an art-finance professor at the University of Luxembourg and Stanford University’s Hoover Institution, told me at the Miami art fair. Kräussl typically uses a database of more than 10 million auction prices going back to 1970 — but says that NFT works like CryptoPunks, Bored Apes, and Cool Cats have already become iconic. “I definitely need more historical data and a better understanding of failed minting transactions, the role of so-called whitelists, and a careful analysis of corresponding Discord servers and Twitter threads,” Kräussl said. “So if I were to start right now a valuation company for NFTs, I would tell you, give me a year or two, because I’m a German academic. I’m cautious. Better to be accurate than fast.”