Key points to consider when investing in non-fungible tokens.
Index
What is an NFT and How Does it Work?
An NFT is a document that attests to the possession of an encrypted digital asset registered on a blockchain. It is usually bought with the cryptocurrency Ether.
The Spanish acronym refers to non-fungible token, a term that leads us to three fundamental characteristics of NFTs: they are unique, scarce and unrepeatable.
An NFT can be an image, a video, a digital work of art, or even a meme. We will review some famous examples later.
In technical terms, an NFT is a digital document with metadata that certifies the authenticity of a virtual piece. This piece, like any digital asset, is on the blockchain, and its owner is the one associated with the address of the digital wallet.
For example, a YouTube video can be commercialized as a non-fungible token. While anyone can view it on Google’s portal, the buyer of the NFT becomes the owner of a unique piece linked to that content.
In short, an NFT can be any digitalizable piece. Its value is established in the supply and demand game.
The 5 Most Common Scams with NFTs and How to Avoid Them
When reviewing the most common scams with NFTs and the recommendations to avoid them, it is necessary to point out that, like any investment, buying a non-fungible token can be a good bet or, at times, lead to a loss of value.
The fact that an NFT goes down over time does not necessarily indicate that there is a fraudulent maneuver behind that asset.
According to The Crypto Times website, scams have always been a threat in the digital scene, also for cryptocurrency investors, and NFTs are no exception to the rule.
The source adds: “There are two types of NFT buyers. The first is aware of how the system works, while the second is less skilled, but still considers them good investments.
The chances of falling into scams are greater for the second one, because it is more likely that scammers will target people with less experience in the markets”.
In view of this, the first advice to avoid scams with NFTs emerges: be an investor who always values information and training.
What are the most frequent scams with NFTs and how to avoid them? Let’s see the 5 most relevant ones.
NFT Plagiarism
Duplication of non-fungible tokens is a typical type of fraud in this field.
What is it about? Bad actors copy an artist’s work, create an NFT and finally offer it in auctions as if it were an original.
This fraud not only affects potential buyers, but also artists who have not given up their rights for the commercialization of their works under this modality.
To avoid this type of NFT scams, investor expertise is essential. The key is to investigate the seller, checking their history on different platforms, including their social networks.
Another point to consider: on pages used for the auction of NFTs, for example on OpenSea, a mark is included next to the seller’s name to indicate its legitimacy.
Pump and Dump
Known in the jargon as “pump and dump“, this scam consists of appealing to disinformation campaigns to overvalue an asset, knowing its little potential and attracting new investors.
When this scheme inflates the price, the holder sells the assets massively, the price falls and adjusts to the real price resulting in a loss for the investors.
This modality usual in the financial field has its counterpart in the NFT market. The path is the same: inflate and then throw away.
The key to avoiding the pump and dump scam is to consult the price history of the NFT collection and the wallet records, data that are offered on the main platforms.
Another recommendation is to review conversations about the token collection on Twitter, on Discord and in specialized communities. Keeping up with the experiences of others is always a good idea to avoid bad drinks.
Phishing and NFTs
Techniques commonly used in computer threats are also adapted to NFTs, trying to take advantage of this form of digital collectivism. Phishing is one of the cases. It is a scam that is channeled through identity theft.
Since non-fungible tokens have become popular, attempts at fraud have been recorded via telephone calls, emails and messages to users, trying to deceive them into sharing the security code to access private wallets.
It is usual for phishing scams to include links that lead to false forms. If a user completes it, then valuable information will be given to the attackers.
To avoid this deception, there are some fundamental recommendations: always verify the URLs, check that they start with https:// (this guarantees the security of that environment), and also check the presence of a small lock next to the address.
It is also a good practice to confirm with the official customer service before sharing any confidential information. If this is necessary in the use of digital solutions in general, it is also necessary when managing electronic wallets.
Hype around NFTs
Hype is a concept that refers to the generation of excessive expectation around a product, service, asset, etc. It also exists in the world of NFTs.
It is usually channeled through social networks, where the token is promoted with force and great promises. The problem? When the investment is made, the developers disappear without a trace.
After the initial exaggeration and the escape, the price of the tokens plummets. That’s how it works. In some cases, the fraudsters modify the code of the NFT and prevent it from being sold later.
This type of fraud is known as a “rug pull“. The anonymity typical of a decentralized environment partly favors this type of fraud.
Insiders point out that these actions are difficult to identify. How do you reduce the risk margin? Look.
Once again, it is important to review the sellers’ profiles, to know their reputation and market history. Another sign to take into account is the number of followers and participation in the networks of those offering the NFT.
Does the development team not respond to inquiries? That is another sign that could serve to identify a rug pull scam.
False influencers in the NFT world
An NFT project can receive a strong boost thanks to the influential people of social networks. Sometimes, popularity is used to deceive.
This type of NFT fraud is usually sheltered in charity. For example, an influencer assures that the money raised will be destined to humanitarian aid, generating even more expectation around the asset. In some cases, the initiatives are simply false.
What to do in these situations? A deep investigation of the project should take precedence and check if the people cited by the promoter (it is common to refer to partners who support the initiative) are really involved.
In summary, following The Crypto Times, the investor should follow a series of good practices to keep his participation in the NFT market away from attempts at fraud.
Curiosity is desirable to know more, the willingness to learn continuously allows you to stay informed, and a watchful eye will help to identify cases in which it simply pays to look at other collections.
3 Frequent Questions About NFTs
To learn more about non-fungible tokens, let’s review some of the most frequent questions about these assets.
What is the difference between an NFT and a cryptocurrency?
A non-fungible token not only represents a value, but a unique and original digital object. It is a limited, variable asset which has contributed to its expansion: scarcity translates into demand.
In summary, an NFT is not a cryptocurrency. Similarly to those, its functioning is based on the blockchain. Additionally, digital currencies are used to buy these tokens.
What is the main value of an NFT?
It is associated with an authenticity certificate and it is impossible to duplicate it. That is why they are the hub of a new form of collecting and in many cases they are profitable.
What are the most famous NFTs?
The auction that inaugurated the NFTs boom was that of the digital work Everydays: the first 5000 days by the artist Beeple, which in March 2021 was sold for the equivalent of 69 million dollars.
Other famous NFTs:
- At the beginning of 2021, a buyer paid around 3 million dollars for the NFT of the first message posted on Twitter in 2006.
- The Bored Ape Yatch Club (BAYC) NFTs are not only known for the funny monkeys in the images that make up the collection, but also for the famous buyers who bought their tokens, including Justin Bieber and Jimmy Fallon.
- At the end of 2021, artist Park starred in one of the most valuable NFT auctions, with almost 30,000 buyers bidding up to offer 9.8 million dollars for the work The Merge.