Art market

Six reasons why Gamestop couldn’t happen in the art market

From lack of supply to prohibitive price points, it seems you can't short art... at least for now

 © Katherine Hardy

© Katherine Hardy

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Unless you’ve been living on the moon, you will certainly know about the hysterical frenzy around shares in Gamestop. The Texas-based chain of video game stores was doing badly, its business based on selling its stuff in shopping malls in the real world—think Blockbuster, and look what happened to that.

As a result, some prominent hedge funds shorted Gamestop, betting its price would fall, then lost millions—even billions—after huge numbers of everyday traders bought the shares. This forced the price up, obliging the shorters to buy back the shares at a much higher price—pushing the price up even more. Gamestop shares topped out at $483 before falling back to $50, leaving a trail of instant millionaires and ruined investors in its wake.

The question is: could this happen in the art market? In my opinion, no, and for six reasons.

First, there is a problem of supply. There are 47 million Gamestop shares on the market and during late January, they were traded millions of times. The art market just doesn’t have that sort of volume and such rapid trading is impossible.

This leads to the second problem: fungibility. Fungibility means that things—such as a share in a company—are interchangeable. Art is not a fungible commodity and even a limited edition of prints will have small differences. There is no way art could be traded like fungible anythings.

But what about the multiple companies offering to split up a pricey works of art into affordable shares? Yes, in theory, but so far one of the best funded, Maecenas, has only succeeded in selling a miserable 31% of a single Warhol. And to my knowledge, no such company has successfully created a trading platform.

This highlights problem three: there is no exchange on which to trade any volume of art instantly.

Problem number four is the price point: Gamestop shares could be bought for around $17 in early January, so enabling anyone with a few hundred dollars to acquire quite a few. But original works of art are way beyond the pocket of almost all of these small investors, even if they could get access, which is my fifth point.

Even if a massive number of works were available, the potential traders would have to find a dealer to buy them from. They aren’t available at auction, and we all know how galleries feel about flipping… they are unlikely to sell to someone they suspect of being a speculator.

Finally, you can’t short art (yet). This means you can’t borrow a work of art and agree to sell it an agreed price, wait for its price to go down, buy it back at the lower price and bingo! Bank the difference. Art rarely goes down in price; it’s a question of confidence in the market. Dealers and collectors tend to maintain price levels to protect their investments.

Does this mean that there is price manipulation in the art market? Certainly, yes. But that is a subject for another time.