Intro to NFTs for Estate Planners

You would have to be living under a rock not to have noticed some of the recent headlines touting astronomical figures achieved for non-fungible tokens (NFTs) at auction (for example, “Beeple collection sells for $69M”). These headlines underscore how cryptocurrencies and NFTs are becoming a bigger part of the investment world. Some early investors in this space have achieved truly extraordinary returns, and others have lost millions.

Unless you have direct experience, however, you’re probably a bit confused and unclear about how these new asset classes actually work, let alone how to properly advise clients about them.

Related: Are NFTs Really Art?

Here’s a framework and a practical guide for how to advise clients about investing in NFTs.

NFTs: Like Collectibles

Related: What the Rise of NFTs Means for Advisors

Many articles explain what NFTs are and how they work. In summary, NFTs are digitally authenticated, unique tokens that either contain or link to images, videos or other digital assets. Authentication records are stored via distributed blockchains.

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 well beyond these categories.

Clients may question you as to why they need to purchase an NFT. They may think they can just right-click and save the NFT image to their computer. To respond, use Leonardo Da Vinci’s Mona Lisa as an example. Any of us can save an image of the Mona Lisa on our computer. We can print out a copy and put it on our wall. We can use it as a screensaver. However, this doesn’t make the original, verified Mona Lisa painting less valuable. In fact, the more an image is spread and used by others, arguably the more valuable the original, authenticated version becomes.

A one-of-one NFT is, essentially, like an original work of digital art. Purchasing the NFT is on par with purchasing a third-party authenticated original “painting.” In contrast to traditional art, authentication isn’t provided by an auction house or museum—it’s irrefutably proven on the distributed blockchain, so no third party is needed for proof.

Numbered NFTs (for example, one of 250 in a series) might make you think of numbered prints or collectible baseball cards as a comparison. Again, anyone can take a photo or image of a baseball card, but value lies in owning an authenticated, physical copy of a card. With NFTs, instead of owning a verified physical copy, you own a blockchain authenticated “print” of an original piece.

To resell a high value sports trading card, you typically need third-party authentication and a “grade” of the condition of the card via a specialist at Professional Sports Authenticator, Beckett or other grading service. Again, with NFTs, no third-party verification is needed, and sales can occur instantly online, making NFTs more liquid than traditional trading cards.

Purchasing NFTs

U.S. dollars. To purchase NFT sports cards or licensed National Basketball Association or Major League Baseball “moments,” you can use U.S. dollars at NBA Topshot (nbatopshot.com) or Topps MLB NFTs (Toppsnfts.com).

To purchase NFT art with U.S. dollars, the easiest and most recognized site is NiftyGateway.com. Here, you can use cash transfers or credit cards to purchase NFT artwork via “drops” (time-limited or drawing-based opportunities to buy brand-new works) or via the secondary marketplace.

Ethereum or other cryptocurrencies. The vast majority of NFTs are only available for purchase “on chain” with other cryptocurrencies. Ethereum is the most common currency used for buying or selling the majority of NFTs.

Purchasing NFTs with Ethereum isn’t something I would recommend for any “newbie” to the space, because it requires a solid understanding of the ecosystem and of online storage and transfers.

Two steps. For those already familiar with NFTs who wish to make purchases, two steps are required:

Step 1. First, set up a form of online crypto wallet. Metamask is the most common wallet used. Think of this as a way to take Ethereum from one online exchange to another, virtually. Many other options exist.

Step 2. Once set up, you can send Ethereum or another currency from your Coinbase account or other type of storage to the Metamask wallet, using the distinct address associated with the wallet. The Metamask wallet can then be used to “shop” on third-party NFT marketplaces when a user accesses the marketplaces using the browser with the Metamask extension or via the Metamask app on a smartphone. Think of the wallet as a virtual debit card but without an intermediary or institutional support.

Once a purchase is made with Ethereum in the wallet via an online marketplace, the Ethereum is transferred to the seller and the NFT is transferred into your wallet, where it can be listed/sold on the same or other online exchange. NFTs can also simply be held in a Metamask wallet.

OpenSea.io is the largest online marketplace for NFT trading. Many others exist, including Superrare.com and Foundation.app.

Risky Investment?

Unfortunately, there’s no easy way to invest directly in most NFTs. Few are available for purchase with U.S. dollars, but there are exceptions. Most require another form of cryptocurrency, most commonly Ethereum, via online wallets that must be connected with third-party NFT marketplaces.

It’s likely that easier and more secure options will soon emerge for investing in this space. On the flip side, the “wild west” aspect of NFT investing means that those bold or courageous enough to take on the challenge may benefit massively once regulatory and security concerns are better managed and when more institutional money pours into the space.

The recommended allocation is very specific to the investor, their age and risk profile and familiarity with blockchain-based investing. I’m an attorney, not a licensed financial advisor, but I would submit that it’s advisable for anyone with a longer investment time horizon to have some exposure to cryptocurrencies, with a focus on “blue chips”: Bitcoin and Ethereum.

I would only recommend that a client consider investing in NFTs if they’re willing to lose, or if they already have significant cryptocurrency holdings and are at least somewhat familiar with blockchain investment and trading.

*The full version of this article, “How to Talk to Clients About Crypto and NFTs,” appeared in the February 2022 issue of Trusts & Estates.