You have to be under a rock to see the recent headlines raving about the astronomical figures achieved for non-fungible tokens (NFTs) at auction (e.g., “Beeple Collection Sells for $69M”) . These headlines underscore how cryptocurrencies and NFTs are becoming a huge part of the investment world. Some early investors in this sector have achieved truly extraordinary returns, and others have made millions.
Unless you have direct experience, however, you are probably a little confused and unclear about how these new asset classes actually work, how to properly advise clients about them.
Here is a framework and practical guide on how to advise clients about investing in NFTs.
NFT: Like Collectibles
There are many articles explaining what NFTs are and how they work. In short, NFTs are digitally authenticated, unique tokens that either contain or link to images, videos or other digital assets. Authentication records are stored through a distributed blockchain.
To understand the concept in simple terms, let’s compare NFTs to three existing collectible categories: (1) original pieces of art, (2) certified/numbered prints of original art, and (3) sports trading cards. This is an oversimplification, as new classes of NFTs are emerging that go far beyond these categories.
Customers may ask you why they need to buy NFTs. They may think they can just right-click and save the NFT image to their computer. To answer, use Leonardo da Vinci Mona Lisa As an example. Any of us can save the picture of Monalisa in our computer. We can take a print out of a copy and put it on our wall. We can use it as a screensaver. However, this does not make the original, verified Mona Lisa Painting less valuable. In fact, the more spread an image is and is used by others, arguably the more valuable the original, certified version is.
One-on-one NFTs are, essentially, like an original work of digital art. Purchasing NFTs is equivalent to purchasing an original “painting” certified by a third party. Unlike traditional art, authentication is not provided by an auction house or museum – it is proven irrefutably on a distributed blockchain, so no third parties are required for proof.
Numbered NFTs (for example, one of 250 in the series) may make you think of numbered prints or collectible baseball cards as a comparison. Again, anyone can take a picture or image of a baseball card, but the value lies in owning a certified, physical copy of a card. With NFTs, instead of owning a verified physical copy, you own a blockchain certified “print” of an original piece.
To resell a high-value sports trading card, you usually need third-party certification and a “grade” of the card’s status through a professional sports authenticator, specialist in Beckett or other grading service. Again, with NFTs, no third party verification is required, and sales can happen instantly online, making NFTs more liquid than traditional trading cards.
US dollars. To purchase NFT Sports Cards or licensed National Basketball Association or Major League Baseball “Moments”, you can use US dollars at NBA Topshot (nbatopshot.com) or TOPS MLB NFT (Toppsnfts.com,
The easiest and most recognized site to buy NFT art with US Dollars is Nifty Gateway.com, Here, you can use a cash transfer or credit card to purchase NFT artwork through “drops” (a time-limited or drawing-based opportunity to purchase brand-new works) or through the secondary marketplace.
Ethereum or other cryptocurrencies, Most NFTs are only available for purchase “on chain” with other cryptocurrencies. Ethereum is the most common currency used to buy or sell most NFTs.
Buying NFTs with Ethereum is not something I would recommend for any “newbie” in the space, as it requires a solid understanding of the ecosystem and online storage and transfers.
two step, For those already familiar with NFTs who want to make purchases, there are two steps required:
step 1, First, set up a form of online crypto wallet. MetaMask is the most common wallet used. Think of it as a way to move Ethereum from one online exchange to another. Many other options exist.
step 2. Once set up, you can send Ethereum or other currency from your Coinbase account or other type of storage to MetaMask Wallet using the unique address associated with the wallet. The MetaMask Wallet can then be used to “shop” on third-party NFT Marketplaces when a user accesses the Marketplace using a browser with the MetaMask extension or via the MetaMask app on a smartphone. Think of Wallet as a virtual debit card but without any intermediary or institutional backing.
Once a purchase is made with Ethereum in Wallet through the online marketplace, the Ethereum is transferred to the seller and the NFTs are transferred to your Wallet, where it can be listed/sold on the same or other online exchange. Is. NFTs can also only be held in the MetaMask wallet.
OpenSea.io The largest online marketplace for NFT trading. Many others exist, including Superrare.com And foundation.app,
Unfortunately, there is no easy way to invest directly in most NFTs. Some are available for purchase with US dollars, but there are exceptions. Most require another form of cryptocurrency, most commonly Ethereum, via an online wallet that must be connected to a third-party NFT marketplace.
Easier and more secure options are likely to emerge soon for investment in this sector. On the other hand, the “Wild West” aspect of NFT investing means that those brave or courageous enough to take on the challenge can benefit massively when regulatory and security concerns are better managed and when there is more institutional funding. is inserted into space.
The recommended allocation is very specific to the investor, their age and risk profile, and familiarity with blockchain-based investing. I’m a lawyer, not a licensed financial advisor, but I’ll submit that it’s reasonable to take some exposure to cryptocurrencies, with a focus on bitcoin and ethereum, the “blue chips” for long-term investors. Is.
I would only recommend that a client consider investing in NFTs if they are willing to lose, or if they already have significant cryptocurrency holdings and are at least somewhat familiar with blockchain investing and trading.
*Full version of this article, “How to Talk to Customers About Crypto and NFTsappeared in the February 2022 issue of Trust and Estate.