Insuring Your Digital Assets: From NFT to Cryptocurrency

Insuring Your Digital Assets: From NFT to Cryptocurrency

In 2021, the digital asset market is developing rapidly. The crypto money market, whose total volume exceeds $ 2.5 trillion, is expected to continue to expand rapidly. While interest in cryptocurrencies has grown steadily in recent years, the development of crypto art and NFTs (non-fungible tokens) has recently led to increased worldwide awareness of just how valuable online assets can be. Both well-known companies and individuals continue to gravitate towards this concept, often through a combination of self-interest and investment potential.

However, given that these assets do not exist physically, important questions arise regarding value, projection, insurance and protection policies. As these digital assets become a hot topic in multiple industries such as finance, technology and creative circles, we discuss how these new asset categories can be insured and the benefits and risks of investing.

Understanding digital assets

Digital assets, also known as ‘crypto assets’, often refer to assets that do not have a physical presence and are owned online. The most widely used cryptoassets for investment are cryptocurrencies, which are digital currencies, and NFTs. NFT is short for ‘non-fungible token’, meaning unique, i.e., one-of-a-kind assets. While these assets include images, photos, logos, musical works and other types of digital content, cryptocurrencies are multiple assets, meaning one Bitcoin has exactly the same value and type as another Bitcoin.

Because NFTs relate to works such as painting and music, they give you ownership of the original work, which may increase in value over time. Others can view the picture or listen to the music, but the original is the property of the buyer. For comparison, you can buy a copy of a Picasso painting, but the actual asset remains with the owner of the original painting.

Benefits of investing in digital assets

As with all emerging assets, the sooner you get a stake, the more likely you are to get paid. Digital assets have been around long enough to have a solid market; so it doesn’t look like it will lose its value anytime soon. Cryptocurrency is an example of how quickly the value of digital assets can increase. Although there are fluctuations in prices, 1 Bitcoin, whose value was 741 TL in 2015, is worth 545 thousand TL today.

Digital assets also have lifestyle benefits, as they don’t require storage or transportation like investments in paintings, wine, gold or other tangible assets.

Nike is just one of the companies to enter digital assets through the Cryptokicks verification system, selling its first digital artwork at Christie’s Auction House in April 2021. It also enters the real estate market with companies that are investigating tokenization options that can speed up the shopping/sales process.

Especially NFTs are creating a new market that can reach a value similar to today’s picture market. Thomas Crown Art Director Stephen Howes describes the concept as ‘NFTs are the biggest investment trend of the decade’.

What are the risks?

Unfortunately, like any asset, these investments come with some risks. One of the main concerns is access: While the blockchain provides protection by recording transactions, digital goods can be lost or even stolen by hackers due to changing passwords and invalid link addresses. It is known that over 101 billion TL of crypto money has been stolen since 2011, so the risk of online theft should not be underestimated.

Market fluctuations that may cause loss of value are always possible; that is, your investment may not offer as good a return as you hoped. In addition, potential legal issues need to be considered, particularly taxes or taxable income on digital assets. Finally, many people overlook the fact that even digital assets can degrade in quality, such as when file quality and file formats change so that they cannot be opened or used in the future.

How can you protect your assets?

Protecting and insuring digital assets can seem very complex. Since they do not have physical assets, it is difficult to determine the fair value. As with all emerging assets, the insurance industry seeks to identify best practices for policies, terminology, risk assessment and definition of payments. Also, unlike more established investment types such as paintings or classic cars, the rapid change in value of these assets complicates insurance transactions.

As a result, while the digital asset insurance industry is growing rapidly, the overwhelming majority of digital assets are still uninsured. Adam Zuckerman, who wrote one of the first academic articles on ‘digital asset insurance’ at the University of Pennsylvania, states that up to 5% of the most popular cryptocurrencies worldwide are insured. However, there are other ways to protect your assets on the internet, especially end-to-end networking and converged product types that provide ‘secure storage’. In the future, we’re likely to see insurance companies deal with digital asset ownership and inheritance planning, for example how protection works post-death or inheritance. In addition, the issues that will be included in the coverage such as how to make insurance payments and loss, theft and copying of digital keys and wallets are already discussed.

Stephen Howes uses these phrases for those who are skeptical of NFTs: “Those who reject the idea of ​​digital art hold the same view as those who ignored the potential of the internet in the 1990s or claimed that Amazon would not be successful in the 2000s.” It is clear that many experts and big brands see digital assets as the investment of the future. Cryptoassets undoubtedly have a risky market structure, but with the right safeguards, early investment can have tremendous returns.

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