Few trends in crypto have caught on as quickly as non-fungible tokens, or NFTs, which exploded in popularity last year as a way to encode unique items such as artworks or sports memorabilia onto a blockchain.
With collectors estimated to have spent more than $40 billion on NFTs in 2021 — five times more than they paid for fine art at auction — it’s little wonder that the traditional art world is sitting up to take notice.
Enter Caroline Taylor, the 35-year-old founder of Appraisal Bureau.
After training as an art appraiser, putting valuations on paintings and sculptures for collectors and insurers, Taylor is among the vanguard embracing this new world. And with everyone from Madonna to Visa buying NFTs, The Block sat down with Taylor to understand how pros like her start putting a dollar figure on a few lines of code.
“NFTs are a totally different beast” to traditional art, Taylor said via video call. “You have so many other considerations because, with NFTs, you have tangibility, you have utility. There's functions of these things. It's not just a collectible item.”
When valuing a traditional piece of art, the first question in any appraiser’s mind is, “what is the purpose of the appraisal?” she explained. If the valuation is for an insurance policy, then she’ll be working to calculate the so-called retail replacement value – how much it would cost to buy an equivalent piece were this one to get destroyed somehow.
But if, to give another example, the appraisal is for a wealthy individual who wants to write off tax against a museum donation, then she’d calculate the fair market value – which may well be lower than the replacement value.
And whereas traditional artworks will mainly be judged for their beauty, collectability, rarity and provenance, appraising an NFT’s value brings a whole host of new factors into play.
Large price swings
For a start, Taylor points out, some NFTs have an inbuilt utility — allowing you to defeat a video game boss or granting access to a real-world country club, for example. And others confer ownership of underlying assets, like the copyright on an artwork.
To complicate things further, NFTs trade on blockchain networks which may themselves experience large swings in price. The price of ether on the Ethereum network, where the vast majority of NFTs live, has been as low as $1,800 and as high as $4,800 over the past year.
“About 10 different data points get tracked every day,” Taylor says. “Because these things sit on blockchains, they’re sitting on a volatile currency.”
Appraisers produce a detailed report — the example Taylor shared with The Block is 20 pages long — examining how much collectors have paid for similar works in recent years, at galleries and at auction. These valuations should conform to a manual of ethics and standards known as USPAP, the Uniform Standards of Professional Appraisal Practice, with appraisers having to complete regular training to stay compliant.
The entrance of professional appraisers into NFTs is an intriguing development for crypto, a market that can trace its mistrust of centralized authorities and middlemen all the way back to the Bitcoin whitepaper in 2008.
But while those happy simply to buy and sell NFTs can trade at the market price, those purchasing insurance or writing a will may well be forced to seek out appraisers such as Taylor, who can give an independent expert’s view.
And while some practices from the art world rub off on crypto, perhaps some of crypto’s culture of transparency and traceability will rub off in return.
“The art world is very opaque and a lot of business is done in a very opaque way,” according to Taylor. “In a private sale, you're not going to know who the other party is for the most part and that's something that regulators have taken an interest in. Because the big issue is money laundering, of course — just wires coming in and out. And if you don't know who the buyer is or where the money's coming from, that’s a problem.”
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