NFT investing is seeing a rise of complex scams tricking many eager buyers out of their investment. Verification sites and insurance providers try to protect investors, but scammers continue to profit off the “wild west” atmosphere of NFT investing.
What is an NFT?
An NFT (non-fungible token) is a non-interchangeable unit of data stored on a blockchain, a form of digital ledger, that can be bought, sold, and traded, similar to stock. Each NFT represents a real-world object like a song, video, in-game item, art, real estate, or even things like digital baseball trading cards.
These digital assets are bought and sold online, typically with cryptocurrency. In comparison, physical money or bitcoin is “fungible,” meaning they can be exchanged for one another.
Tokenizing real-world items allows them to be bought, sold, and traded efficiently while reducing the possibility of fraud.
Who uses NFTs?
A popular NFT called the Bored Ape Yacht Club is reportedly owned by Paris Hilton, Jimmy Fallon, and many other celebrities. Their investments have done a lot to legitimize and popularize the use of NFTs. Thanks to their growing popularity and notoriety, NFTs are likely here to stay.
Hilton and Fallon talked about their ownership of Bored Ape Yacht Club NFTs on The Tonight Show Starring Jimmy Fallon the week of January 16th. But just one week earlier on January 11th, an NFT by a similar name, The Big Daddy Ape Club, scammed investors out of $1.13 million.
Investors of Big Daddy Ape paid for the tokens, but the NFTs were never minted.
Minting NFTs is a process akin to minting metal coins put into circulation. NFTs have to be minted to have any value and be bought, sold, or traded.
Investors of Big Daddy Ape Club weren’t completely ignorant. A San Francisco-based, decentralized-identity verification company called Civic had previously verified Big Daddy Ape NFTs. However, Civic was wrong, and investors lost large sums of money that is not recoverable.
So how do you avoid this type of scam?
The insurance industry has developed new policies for protecting NFTs investments due to the rising ubiquity of scams in the NFT landscape.
Scams are becoming more prolific as the popularity of NFTs rises and more people dive into the often-complex world of NFT investing using sophisticated technology.
There has been a surge in fake assets made to look like originals, with scammers copying collections and trying to sell worthless JPEGs and counterfeit NFTs. For this reason, NFT investors need to verify assets before purchasing.
Unfortunately, NFT verification is not a 100% fool-proof guarantee.
There are verification tools for NFTs, but the best option for investing in these tokens is to use a reputable website like the NFT marketplace OpenSea.
However, scammers will also impersonate support staff on reputable websites, like OpenSea, or contact users via social media to get them to reveal passwords and security phrases, or open links to fake customer support websites where they steal your information and/or sell you counterfeit tokens.
Like standing in front of a random home and selling a forged deed, buyers of fake NFTs don’t actually own the underlying assets making their investment worthless.
Insurance against these types of scams can take many forms and can protect you against large losses, but NFT investors still need to practice caution.
Check the details of the NFT you are purchasing, review the metadata, URLs of metadata, and URLs for JPEGs. Ensure you purchase NFTs on a trusted site and only invest what you are comfortable losing.