NFT's Future? From Beeple to the First Tweet to Mortgages.

• Author: Gilmore, Trevor J.
• Position: TechTalk

What the what? What is an NFT? You probably first heard this acronym during the GOVID-19 pandemic, replete with stories of insane prices NFTs were fetching at auction, and wondered if your clients, or even yourself, will join the mania. If you were like me, you got some popcorn and saw NFT digital artwork fetch insane values while watching safely on the side lines.

NFTs, or non-fungible tokens, are, at their essence, smart contracts. Part of the decentralized finance, or DeFi, movement, they are typically developed on Ethereum, the digital currency built on blockchain. Ethereum is the second largest blockchain cryptocurrency after Bitcoin.

As the NFT name implies, no two are alike, therefore they are non-fungible. On the other hand, fungible goods are identical, and therefore replaceable, with each other; for example, dollar bills are identical and can be replaced with each. By their nature, an NFT's most practical use may be a smart contract, and not digital art, as we saw with its first incarnation. More on that later.

The $69 Million NFT

Before the NFT craze of the COVID19 pandemic era, minting and trading NFTs was a pastime of a subset of the blockchain community. Then, in March 2021, we saw-two extraordinary NFT transactions (the artist Mike Winkelmann, known online as Beeple, sold an NFT for $69 million and the NFT version of Jack Dorsey's lirst tweet on Twitter fetched $2.9 million), which catapulted the acronym into the mainstream. Since then, NFT valuations have largely deflated. For example, the owner of the original tweet is now selling that NFT on OpenSea.io, the largest online NFT marketplace, with plans to donate proceeds to charity. At time of writing, the highest bid is $26,000.

Valuation

As CPAs, we're concerned with valuation. In this example, the first tweet NFT investor would probably carry the $2.9 million purchase price on their balance sheet as an intangible asset. Since they are an individual, I'm assuming they do not have to adjust for lair value each year for financial reporting purposes. If it transacts at $26,000, there is a realized loss of $2.874 million.

Now, if the owner was an entity with fair value reporting, how would the value be determined each year? As a valuation professional, I'm a big fan of the cash flow approach to value. Assigning projected cash flows to an artwork NFT would require cash flows something like a licensing arrangement. The market approach is the next logical step, and there are...