NFTs for Financial Advisor Explained

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Coins, art, a 1992 Screaming Eagle Cabernet Sauvignon – all of these can be valuable given the convergence of rarity and demand.

But what about something that “exists” as digital code and can be copied almost effortlessly?

Enter non-fungible tokens or NFTs. Consultants have no doubt heard a lot about her lately, with jaw-dropping auctions of digital artwork, sneakers, slam-dunk gifs, and trading card reveals.

Like other tokens, NFTs use the same blockchain principles used in cryptocurrency to program and record identifiers, transactions, and “ownership” of a digital asset. Just as a piano reliably plays every note when a key is pressed, tokens are tuned with certain attributes. But unlike a piano, the blockchain will (theoretically) never be out of tune or in need of repair. By tokenizing an asset – assigning a unique code sequence – and storing that code in a decentralized ledger, “ownership” of the asset becomes a discreet thing that can be bought and sold.

For advisors, ownership is the most accessible analogy, said Will Trout, director of asset management at Javelin Strategy and Research. “An NFT is a digital property that has its own identity in the blockchain,” he explained. “A unique registration is assigned to the blockchain.”

Another way to think about NFTs is to get a concert ticket, said Ben Weiss, co-founder and COO of CoinFlip, a bitcoin ATM operator. “Most concert tickets look the same, but the barcode on the card contains specific information that is unique to the buyer, the date of the event and the venue,” he said. “These dates make it impossible to trade all concert tickets interchangeably.”

The decentralized open source blockchain and associated smart contract functionality commonly used for NFTs is Ethereum, although other networks can also be used.

Unlike the drafting of contracts or deeds, where a lawyer usually at least reviews the process, the minting of NFTs is not subject to such formalities. NFTs are therefore more accessible, but also riskier. Artists or even celebrities like Lindsey Lohan who shape NFTs simply need to be able to write their own code, according to a report in The business of business (a blog from the data provider Thinknum).

It is important that the NFT is not the actual digital property. “The newly minted NFT typically does not contain a graphics file or other data that makes up a work of art,” the report said. Instead, the NFT points to the location of the file outside of the blockchain.

Understanding why NFTs are valuable is less difficult than understanding how they’re made. “Social media starves for capitalism,” writes Lex Sokolin, fintech analyst and author of The Fintech Blueprint. “Blockchain-based NFTs are reintroducing the concept of property rights into digital media markets through software-based capitalist logic.”

It’s a growing marketplace. Last month, the NFT trading platform OpenSea recorded a trading volume of $ 95 million, while Rarible, another NFT trading platform, recorded a trading volume of $ 18 million, according to Dune Analytics. This month, OpenSea has already had a trading volume of $ 83 million, and Rarible has surpassed last month’s volume and exceeded its trading volume of $ 20 million.

It just scratches the surface, said Sasha Fleyshman, portfolio manager at Arca, a financial services company that builds products that use and invest in digital assets. “There are already subsectors in the NFT space, [like] digital land, games, sports, music, social, [and] Art / collectibles, all of which have different value drivers, “she said.” I believe that as space spreads, new subsectors will emerge as the next generation of NFTs offer products with a wider breadth than what is currently available. “

Advisors should educate themselves about NFTs even if they cannot (or cannot) include them in official financial advisory channels, Wally said Okby, senior analyst for the Aite Group’s wealth management division. NFTs are not regulated and disclosure of conflicts of interest is next to impossible, he said. They don’t even seem to follow the rules of traditional finance. But they are discussed and should not be dismissed.

Consultants don’t have to look any further than crypto. “Asset managers who have completely blown Bitcoin away are missing out on something,” he said. “If you don’t have an opinion about something, it’s okay to say that you don’t have an opinion. But if you bring it down, it sends a signal to the client that this money manager is not really paying attention to what is going on in the market. “

In addition, the clients of consultants could well invest in crypto or NFTs themselves without considering this as part of their overall financial picture. It’s worth asking the client, but what if the advisor isn’t even sure what he or she is asking about?

Consultants are familiar with private equity investing and platforms like iCapital Network, Trout added. Private banks will hold art as collateral for loans. The wealth management industry also needs to become familiar with cryptocurrency and NFTs, he said.

“Consultants have to deal with emerging value-added businesses,” he said. “You’ve seen an embrace of nontraditional assets, both liquid and illiquid.”

Even events like the surge in GameStop Corp.’s share price. According to entrepreneur Mark Cuban, the beginning of 2021 can be partly explained by a similar way of thinking.

“The [WallStreetBets] Traders apply the same principles of the Digital / CryptoAsset world to the exchange and they love the fact that the old school kids hate them, ”he wrote earlier this year. “You know Wall Street hasn’t changed much in generations. Sure, it went digital in many ways, but the way the game was played hasn’t changed. Wall Street is 100 percent top-down and regulated. “

“A share is just another digital store of value,” he stated.

However, understanding value is different from identifying what is valuable. Collectors know their subject, whether digital or not; Amateurs often guess. Investors need to be careful, warned Okby. “Cryptos are more secure than NFTs,” he said. “With Bitcoin, one Bitcoin can be exchanged for another, regardless of who the counterparty is. This is not the case with an NFT. Every NFT is unique. “

Disagreement about value is why NFT marketplaces came into existence in the first place. Prospective investors need to be careful – understand the “value” of the underlying asset now and have an informed view of its future value. Similar to any tradable security.

Of course, investors also have to trust cryptocurrency and blockchain networks. Both aspects underpin NFTs.

“Consultants have to face the phenomenon of digital assets, whether they are crypto coins or NFTs, as the ghost is unlikely to return to the bottle,” Trout said. “There will be ups and downs. It may be a wild ride, but the park will stay open. “

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