WHAT TO KNOW ABOUT NFTS
March 1, 2022
A nonfungible token (NFT) is a unique digital code that represents a digital item, usually art or music. This code runs on blockchain (a secure, decentralized, and crypto-backed online ledger). NFTs provide proof of ownership of virtual collectibles. That explanation may cause confusion, but when it comes to NFTs, confusion is half the fun.
The sale of multimillion-dollar NFTs over the last year has prompted growing interest in them—and plenty of questions. Namely, what exactly are NFTs, how are they used, and why would anyone be interested in them? This article aims to answer those burning questions.
NFTs can generate new streams of revenue for online creators and be a store of value for collectors. If you own NFTs or plan to invest in them, have you thought about integrating them into your estate plan? Handing down an NFT is more complicated than passing on a physical item or other traditional assets. But with buzz building around NFTs, they could end up being among the most valuable items in your estate.
WHAT ARE NFTS?
As the name indicates, the token is nonfungible. In other words, it is unique and cannot be directly replaced by, or exchanged for, another token.
Fungible assets, on the other hand, are easily exchanged. For example, the US dollar, or Bitcoin. One dollar bill can be exchanged for any other dollar bill; one Bitcoin is always equal to another Bitcoin. You can also break fungible assets down into smaller denominations, such as four quarters in exchange for one dollar.
But, back to NFTs. No two NFTs are the same. Each token is one of a kind. Here is where things can get tricky: NFTs do not necessarily derive their worth from their uniqueness, even though that is part of their value.
Typically, an NFT is linked to a specific digital item and serves as a sort of certificate of authenticity for that item.
NFTs represent the following types of digital collectibles and assets, among others:
● sports cards (e.g., NBA Top Shot)
● digital art, such as music, videos, and images
● tokenized version of tweets and GIFs
● trading games
● videogame in-game items
● virtual real estate (e.g., Decentraland)
NFTs can also represent unique real-world items such as event tickets, one-of-a-kind fashion items, and legal documents such as property deeds and car titles. However, the tokenization of physical items is not yet as developed as the tokenization of digital items.
HOW DO I BUY AN NFT?
Most NFTs are sold in online marketplaces. Some of the most popular NFT marketplaces are OpenSea, Mintable, Nifty Gateway, Rarible, and Zora.
NFTs must be purchased with cryptocurrency, such as Bitcoin. The most popular blockchain for buying NFTs, however, is Ethereum. To get started, you will need a crypto wallet - an app that allows you to send and receive crypto and make purchases. Once you are on an NFT marketplace site, connect your wallet. You can then search for and buy NFTs in an auction-style setting.
WHAT DO I DO WITH AN NFT?
Congratulations, you are the owner of an NFT. Now what?
You are never going to be able to hold an NFT in your hand or hang it on your wall to impress your friends. What you can do with an NFT depends on what it is. If it is digital artwork, you can display it on a monitor or inside a virtual world. The full potential of NFTs seems tied to the development of 3D digital environments.
You might want to just hold on to your NFT as an investment. If its value goes up over time, you can sell it for profit. Last year, a collector who bought a $66,000 NFT from artist Beeple sold it four months later for one hundred times the amount they paid! Another work from the same artist sold for nearly $70 million at Christie’s auction house.
While you may not be able to physically possess an NFT, it can be worth very real money. That NFT you buy today could end up being worth more than any of your traditional accounts and property.
TRANSFERRING AN NFT VIA ESTATE PLANNING
Each NFT can have only one owner at a time. The NFT is not kept in your physical wallet, but instead on a decentralized blockchain. Your digital wallet, that stores the NFT, has 'keys'. The wallet must be compatible with the type of blockchain on which the NFT is built (usually Ethereum).
During your lifetime, transferring an NFT can be done in a matter of minutes. You select the NFT you want to transfer from your wallet, enter the recipient’s wallet address, and send the token. You also have to pay a transaction fee.
Access to your digital wallets should be part of your estate plan. Without an estate plan that ensures access to your cryptocurrency, NFTs, and other digital assets, they could be lost forever. Lose the key, and lose access to potentially thousands to millions of dollars. In your estate plan, you can include instructions about whom the assets should pass to, when they should be transferred, and how to log into your digital wallets.
Do you need help setting up an estate plan that covers traditional property and nontraditional digital assets? Do you have questions about your digital legacy and NFTs? Reach out to our office at 614-389-9711 to schedule an appointment with an estate planning attorney.