Metamorphosis of the Art Market Explained

Introduction:

In times of economic crisis, the cultural sector often receives one of the hardest blows. Tracing back to the 14th century, before the Renaissance, the Black Plague consumed one-third of the population in Europe; thousands of the fallen ones made a life out of the arts. The backbones that art has been standing on for centuries have always been quite fragile by nature. An economic crisis can easily cripple the balance of the art sector, but history has witnessed how the aftermath of a social or economic crisis actually can turn beneficial. The Black Plague took the lives of millions throughout Europe; nonetheless, after the nightmare, a myriad of wealth and prosperity dispersed throughout the continent, and affluent people had the freedom to spend their wealth in art. The Medici family is the paragon of artistic patronage during the Renaissance. Would it be possible that in actuality, the art market recovers, and in fact, grows from this crisis?

In more recent times, after the end of the Global financial crisis, in 2009, the global art market had plummeted 40% of its value. In 2010, the art market rehabilitated and during the last decade, the global value of the art market has maintained reasonable stability. In 2019, the art market value was worth over 64 billion USD; one of the highest points in history (Lock, 2020). Despite the stable rise from the last economic recession, the C-19 pandemic acquainted the art market with an unprecedented relentless wave of economic conundrums that changed the nature of the traditional art market. All over the world, art businesses have been forced to contemplate their horizons to survive, from lucrative art juggernauts, like Art Basel and Sotheby’s, to emerging art galleries. The art sector as a whole has been left without other options but to adopt new technologies capable of maintaining their financial health afloat. While we keep living in a contemporary environment that is highly sensitive to health pandemics, online markets will be the most efficient vaccine to sustain the financial health of the art sector. Art mediators are worried that art crime could be facilitated in the online world. A promising solution could be the adoption of the same technology is used to protect cryptocurrencies, such as Bitcoin. This technology is called blockchain, and it has the potential to ensure the trustworthiness of art sales, reduce art crime, and democratize the general art market in the digital realm.

The challenges that the art market faces today drastically differ from the challenges it faced during the Black Plague, nonetheless, it is indisputable that the C-19 offers the art sector the possibility to expand its arms into a digital realm that could facilitate the dynamics for everyone interested in the art market.

Learn how C-19 has been affecting the art market; how the art market copes up with the pandemic; and how the cryptocurrency security system is the perfect fit to enable safe online trade:

A Crisis Always Crushes the Cultural Sector:

The C-19 pandemic abruptly hobbled the global art market in early 2020. The first checkmate started in February, when Art Basel Hong Kong announced its official cancellation (Art Basel Hong Kong). Later in March, in the Western front, TEFAF Maastricht closed its doors four days earlier than supposed (Kinsella, 2020). Soon after, the rest of the art fair arena started taking precautions too: Art Dubai, Art Basel Switzerland, Art Basel Miami Beach, Photo Basel, TEFAF New York, Frieze New York, Frieze London, and Unseen Amsterdam, either by cancelling their events or by posponing them to the last months of the year. Auction houses have also been affected by the C-19 turmoil. For instance, Christie’s and Bonhams rescheduled their presence from Asia Week New York (Deniz Caglar, 2020).

Although the screams of smaller players of the art market do not make as much noise as the boisterous dominant art fairs and auction houses, young art galleries do not stand too far from the eye of the hurricane. In the United States alone -the largest art market in the world according to Art Basel (2019)- the average economic impact that a cultural/art organisation has received is estimated at 38,000 USD (Americans for the Arts, 2020). The later data suggests that if the art sector does not integrate a fast strategy to combat the C-19, many art mediators both from big and small business will be forced to pack their bags and migrate to another sector.

The digital world offers different tools that enable the art market to adapt and evolve during the C-19 crisis. Many of the later mentioned organizations have welcomed virtual platforms that connect galleries, art collectors, and artists through the web. The frontrunner in the digitalisation race was Art Basel Hong Kong. After the art fair announced the cancellation of its 8th edition, its organizers rapidly implemented a digital initiative coined “Online Viewing Rooms” that promised to showcase “artworks to Art Basel's global network of patrons, as well as new collectors and buyers” (Art Basel, 2020). Art Basel Hong Kong’s contingency plan received 250,000 visitors, while gallerists and curators were busy hosting hundreds of visitors through their Zoom video-tours. Emerging galleries emphasized that the video-tours helped the young galleries be noticed (Art Basel, 2020). Despite, the promising future that the online galleries offer to the growth of the art market, art is an experienced good that can be hardly replaced by a screen.

A top art-industry veteran auctioneer, Simon de Pury, emphasised to Artnet News that “the main evening sales at Christie’s, Sotheby’s, and Phillips […] are exciting events to attend […]. The majority of the people in the auction room […] create the electric atmosphere” (2020). Despite addressing the unique modus operandi of the art market, de Pury also expressed enthusiastic optimism for the future of online sales. De Pury stressed he is a big soccer fan, and that online art fairs can be as exciting as a football match watched from a TV. He pointed out that the experience of watching something through a screen or, on the other hand, accompanied by a roaring crowd are different experiences, but in his own words, “the show itself doesn’t change” (2020). Other top-level mediators do not show as much optimism as de Pury: the co-founder of art gallery Levy Gorvy, Domonique Lévy has attended Art Basel for many years. Even though she acknowledges the necessity of the implementation of a digital platform, she does not believe the online market will overthrow the modus operandi of the art fairs. She expressed to CNN Money Switzerland, that “an online Art Basel has [no] future” (2020).

The dilemma of whether the online art market will surpass the traditional art market is still ambiguous. Nonetheless, the stats and its numbers suggest that the online art market will keep growing exponentially. Before the pandemic affected the economy, the value of the online art market was forecasted to escalate 9.32 billion USD by 2024 (Lock, 2019). This was before, big and small players were forced to go digital! Thus, it is prudent to say that the crisis has not only accelerated the speed at which the art market is digitized but also that the worth of the global online market value could inflate like an elephant on a lava cake diet.

Digitalisation of the Art Market:

The rapidly growing online art market presents various optimistic opportunities for art mediators, such as the facilitation, democratization, and expansion of trade. Nonetheless, both traditional and online art markets suffer notoriously of art crime (such as forgery) which can be perpetrated due to the lack of accredited information about artworks.

Economics (of the Art Sector) in a Nutshell:

[ In a utopian art market, the market allocates resources to produce the appropriate amount of supply the art lovers demand; this process is done by the invisible hand.

In simple words, if the invisible hand fails to allocate resources to produce the appropriate supply the market demands, the market inevitably falls into market failure. A factor that could generate market failure in an industry is the existence of asymmetric information between producer and consumer. When a seller (or mediator) possesses more information about a given artwork than the collector, the mediator can easily take advantage of the naive collector. Where there is money there are scammers, and it is not as uncommon to see ignorant art collectors spend from hundreds to millions of dollars on fake art. ]

For five years, the FBI conducted an investigation over the American artist Ken Perenyi, who was indicted for making fake paintings that sold at major galleries and auction houses in New York and London. Perenyi confessed he did not plan to become an art forger, but rather he had a hidden talent that could give him the life he wished to live. When asked if he could create legitimate forgery as he used to when young, Perenyi stresses that “despite the scrutiny [...] [there are] many areas where you can stay under the radar” (2019). Many art dealers, as well as collectors, are afraid Perenyi’s words are true, and that art forgery could duplicate in the art market. The annual value of art crime tops 6 billion USD (Whitman, 2017). But in fact, online art trading platforms present a feasible way to decrease the asymmetry of information between buyers and sellers, thus also decrease art crime across the world. A modern technology, known as “blockchain” (usually used for cryptocurrency security) offers the opportunity to handle uncertainty among buyers and sellers of the online world.

How Does the Blockchain Work?

A reason why art crime and forgery prevails is that most software that manage economic transactions are hackable. A blockchain manages data vigorously without needing an antivirus nor a firewall. To understand it, one must literally imagine a digital chain of blocks. Each block in the chain possesses three things: (1) information about a transaction, (2) the block’s “hash”, and (3) the hash of the previous block. The information in the block refers to the data about a given transaction or object that must be kept in record. In the case of an art piece- the sender, receiver, dates, prices, etc. The data of the block is assigned a “hash”. The “hash” is an unrepeatable and unique code developed for a particular block. Each block contains its own hash and the hash of the previous block so that a given block can only fit into a specific and unique position in the blockchain. Any attempt to change or modify the information on a particular block will automatically change the block’s hash, thus the given block will not fit anymore into the position and the blockchain is abruptly disrupted.

How Does Blockchain Protects Data?

Blockchain protects data democratically, not form a centralised institution such as a bank. Instead, thousands of users possess a copy of a given blockchain, say the blockchain of a painting. If any of the users attempts to change the information from the blockchain, the other users are notified, and the account of the user who intended to edit the blockchain becomes annulled and the changes are refuted.

Three Solutions to Help the Art Market Battle the Asymmetric Information?

  1. The first problem regarding asymmetric information concern the conspicuous traffic of fake artworks in the art market. According to Geneva Fine Art Analysis (FAEI), between 70 to 90% of the artworks that they revise are fake (Larson, 2014). A blockchain could generate a cryptographic proof that selectively reveals reliable attributes about an art seller, as well as the art piece being sold. This presents an efficient technological solution to better inform consumers about their purchases.

  2. The second problem the blockchain could resolve concerns transparency. There is a long list of external factors and characteristics that influence the price of an art piece— economic situation, artworks life cycle, trends, price of alternatives, the historical value of the product, and more. According to the conceptual artist John Baldessari, the number of parties the artist gets invite to also influences the price of the artwork (2008). Lacking all the information about a product could be unfavourable for either of the parties involved in the transaction. A blockchain presents the possibility to introduce a shared safe data reality across entities in the market that reveals the factors that define the market price of an artwork.

  3. A third solution the blockchain could introduce regards the ethical dissemination of shared information in the art market. Currently, Christie’s and Sotheby’s, often viewed as art market oligopolies, are the dominant auction houses that art buyers can trust (Codignola, 2003). Nonetheless, since the blockchain offers a transparent market where data is disseminated across different parties, the blockchain presents the same degree of certified reliability of any other prestigious auction house. Consequently, blockchain could attract a larger market to engage in art transactions democratically.

Conclusion: the Inevitable Although the art market is a business that has been on the rise for over ten years, its financial health tested fragile symptoms that can be easily crippled by external factors, such as information asymmetries, pandemics, or an economic crisis. The financial health of the art market has not yet developed an immunity system strong enough to cope with a financial crisis nor a pandemic. Albeit, the C-19 crisis can be seen as an onslaught to the art economy, it also fast-forwarded the digitisation process of the art market.Perhaps this should be an indicator of the necessity of more critical discussions revolving around the changing nature of the art market and modus operandi of the cultural and art institutions. But with the number of online art sales rising, we might have to get accustomed to seeing more art institutions with online arms to support their sales and reputation.To cope with the crisis, fairs, auction houses, and galleries have found economic shelter within the digital realm. It is still debatable whether art mediators are willing and able to adjust to an online modus operandi that does not distinguish too much from Amazon drudgery shopping. Nonetheless, it is out of the discussion that e-commerce is the only bullet that the art arsenal has to survive the pandemic. Additionally, e-commerce welcomes new tools, such as the blockchains, to fix problems that have been already threatening the traditional art market for decades.

The blockchain is a mere example of modern technologies that are at our disposal waiting to be discovered by art entrepreneurs that have enough courage to dive into online waters. In the case of the blockchains, “4,000 art auction houses have already placed their sales record on blockchains” (Beedham, 2019), and it is possible to start seeing more the adoption of more blockchains systems in the upcoming years, particularly after the C-19 crisis will be over. The discussion on whether the digital market is more stable than the traditional market is still under debate and cannot be directly compared since the value of the online art market is a fraction compared to the one of the traditional art market.

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