With record sales of non-fungible tokens (NFTs) on the rise, more and more investors are asking about NFT insurance products. That makes sense, as digital assets are not a nickel and dime game – Entrepreneur Vignesh Sundaresan spent $69 million in 2021 on an NFT, and Twitter CEO Jack Dorsey sold his first tweet as an NFT for $2.9 million.
Investors should care about protecting their digital assets as much as their tangible assets, like property or antique cars. However, the technology of NFTs – and their intangibility – creates unique risks.
In this article, we discuss how technical problems, security risks and volatility would make NFT collectors strongly consider buying NFT insurance products, which insurers and insurtechs are starting to develop and offer.
- Technical problems
An art collector buys a five-million-dollar painting and hangs it only to discover the picture is blank. This is basically what happens when NFTs vanish due to a broken link. A similar risk that we are hearing more and more about is people losing access to their digital wallets by forgetting passwords.
Also, bugs or coding defects in DeFi protocols can cause incorrect functionality, resulting in big financial losses. In October 2021, DeFi protocol Compound mistakenly distributed $90 million to users due to a bug in an update.
When millions of dollars can be lost to an accident as gentle as a few lines of incorrect code, anyone whose wealth is built on digital assets would do well to consider NFT insurance products.
- Security risks
Traditional financial assets are already the target of cyber criminals, and NFT-based assets are even more vulnerable to attacks. Hackers can exploit weaknesses in the program code of DeFi protocols to steal NFT investors’ funds.
Large-sized hacks such as these occur often and cause huge losses to both digital asset custodians and their customers. Until security measure catches up, buyers need to be prepared for the high possibility of cyber attacks.
- Devaluation and volatility
With the cryptocurrency and NFT market still getting its footing, a major risk to investors is the sudden devaluation of their digital assets. According to Coinopsy, a site that reviews Crypto Currencies, ICO’s and Dead Coins, over 2,000 cryptocurrencies have already become ‘dead coins’ for reasons such as being abandoned, used as scam, having low volume or developers walked away from the project, among others.
Another big problem is the overall volatility in the market, with the value of NFTs expected to fluctuate for some time.
Amid limited predictability, investors should consider how the value of their assets could shift dramatically from one day to another and how to best prepare for this possibility.
Investors need to remember that every new technology innovation brings new risks, and it takes time to develop effective countermeasures. The cryptocurrency market is still in its infancy, meaning millions of dollars in assets need to have solid protections in place against technical problems, cyber criminals, or instability in the market. There are still many unknowns about digital assets, but as long as NFTs are worth as much as antique cars – or in some cases, more – there is a tangible need for NFT insurance products.