The cryptocurrency market has become a popular emerging asset class. The promise of quick returns has enticed many, while investing in a market with promising fundamentals has attracted a dedicated investment base. Subsequently, the NFT market has risen as an incredibly popular, lucrative alternative to crypto investing. However, with new asset classes comes new challenges and greater risk. How can you make sure you are protecting your NFT investments?
What is an NFT?
NFT stands for “Non-Fungible Token.” It is a blockchain-based tool which allows individuals to monetize digital content. The value in NFTs is that like physical assets, digital assets can be scarce and in turn, traded purposefully. According to DappRadar analytics platform, the NFT marketplace traded over 10 billion dollars in Q3 2021, a 38,000% increase year over year. NFT’s are a clear emerging asset class for investors, but what drives people to choose the NFT market?
The Growing NFT Marketplace
The motivation for most NFT investors is the long-term value potential of the NFT market. In an increasingly digital world, the use-case for digital assets has increased significantly. In addition, with Facebook’s recent shift towards the Metaverse, the digital world may be closer than we think.
Another attraction for NFT investors is the chance to establish “social capital.” Coined in a CNBC Make It article, this social capital refers to the physical capital equivalent of owning a Rolex watch or a Lamborghini. NFT projects and digital assets have created a community of individuals who use the marketplace to start brands, “flex” their social capital and link themselves with the crypto community.
Insuring NFTs: A Vague Value Proposition
NFTs take on a wide range of forms whether it be art, digital currency or simply an asset. The challenge is valuing an NFT at a fair market price. Under a typical insurance policy, a fine art piece can be valued based on its purchase price. Conversely, with an NFT, the value fluctuates rapidly, a point which has left many insurers hesitant to insure digital assets.
According to an Insurance Business America article, industry leaders are concerned with both first-party and third-party exposures in the NFT marketplace. While a potential solution for third-party exposures is a well-structured cyber liability policy, first-party exposures may present a greater challenge to insuring NFTs. Tangible assets and collectibles are valued very differently, and the manner in which NFTs are custodied may have a significant impact on how they are underwritten.
NFT Coverage Conundrums
As a digital asset, the coverage options available for NFTs are limited. For example, NFTs would not be covered under a standard homeowners or renters insurance policy since coverage is designed to protect against perils causing physical damage, such as fire or vandalism.
In addition, first-party exposures under a personal lines policy such as Fine Arts would likely not provide coverage due to the current lack of accurate valuation data.
However, there may solutions on the horizon. Insurance Business says that “insurers are scrambling to figure out how to provide coverage for those selling, buying, or trading the non-tangible assets.” In the future, the hope is that insurance coverage for NFTs can protect against fraud and intellectual property claims.
How Heffernan Insurance Brokers Can Help
We can’t yet provide coverage for your NFTs, but we can help you protect unique valuables personal collections, and all the things that matter most. Contact the Heffernan Insurance Brokers personal insurance team anytime. We are here to help.