What are NFTs?
NFTs stand for non-fungible tokens. They are unique digital assets that represent ownership of real-world items like art, music, videos, etc. NFTs are bought and sold online, frequently with cryptocurrency. Each NFT has a unique identification code that distinguishes it from other NFTs.
The key characteristics of NFTs are:
- Non-fungible – This means they cannot be replaced by something identical. Each NFT is unique.
- Digital scarcity – Most NFTs have a limited quantity.
- Verification of ownership – The NFT’s unique ID and metadata allow ownership to be publicly verified.
- Programmable – NFTs can be programmed with additional features like profit sharing.
The most popular NFTs right now are digital artworks and collectibles. But the potential uses for NFTs are vast, including real estate, music, financial instruments, and more. While still an emerging space, the NFT market has exploded in recent years, with over $44 billion in sales in 2021.
How do you buy NFTs?
To purchase NFTs you need:
- A cryptocurrency wallet that supports NFTs – Popular options include MetaMask, Coinbase Wallet, TrustWallet, etc.
- Cryptocurrency to pay for the NFT – Ethereum is the most common.
- To visit an NFT marketplace – Top marketplaces include OpenSea, Rarible, SuperRare, Foundation, etc.
Once you connect your crypto wallet to a marketplace, you can browse NFTs and purchase them. Buying an NFT transfers ownership to your wallet. Then you can view it in your wallet, sell it, or potentially use it within certain online/metaverse spaces.
Can you get scammed buying NFTs?
Yes, there are certainly risks to watch out for when buying NFTs. Some potential scams and risks include:
Fake NFT listings
Scammers can list fake NFT copies at lower prices to trick buyers. Always verify it’s the legitimate NFT creator selling the token before purchasing.
Fake marketplaces
Only use well-known NFT marketplaces like OpenSea. Avoid unknown sites which could steal your funds.
Phishing sites
Phishing sites impersonate real NFT platforms to steal your crypto wallet login details. Double check the URL before connecting your wallet.
Rug pulls
Some NFT releases are planned exit scams where creators quickly sell out, then disappear and dump the NFT value.
Pump and dump schemes
Groups artificially inflate NFT prices through wash trading then dump them onto unsuspecting buyers.
Hidden fees
High gas fees, transaction fees, or exchange rates can eat into your purchase value without you realizing.
| Scam Type | Description |
|---|---|
| Fake NFT listings | Scammers list fake NFT copies to trick buyers |
| Fake marketplaces | Phony sites impersonate real NFT platforms |
| Phishing | Fake sites steal wallet login details |
| Rug pulls | Creators quickly sell out and disappear |
| Pump and dumps | Groups artificially inflate prices then dump NFTs |
| Hidden fees | Unexpected gas, transaction, exchange fees |
How to avoid NFT scams
Here are some tips to avoid getting scammed when buying NFTs:
Research creators and collections
Vet any project before investing by researching the creators, community sentiment, floor prices over time, and whether owners are consistently making sales.
Use trusted marketplaces
Stick to major exchanges like OpenSea which vet NFT projects. Avoid direct trades outside platforms.
Confirm transaction details
Double check the NFT metadata, price, and blockchain address/link before purchasing.
Use hardware wallets
A hardware wallet offers better security for your private keys over leaving them in an exchange or software wallet.
Watch for fake accounts and deals
Scammers use knockoff accounts mimicking real creators and limited time deals that are too good to be true.
Monitor listing activity
A spike in duplicate listings from different accounts can signal a pump and dump scam.
| Avoidance Tips | Details |
|---|---|
| Research creators | Vet project legitimacy and community sentiment |
| Use trusted platforms | Major exchanges like OpenSea vet projects |
| Confirm details | Check metadata, price, address before purchase |
| Hardware wallets | More secure storage for private keys |
| Watch for fakes | Avoid knockoff creator accounts |
| Monitor activity | Duplicate listings signal pump and dumps |
Is it risky to buy NFTs?
Buying NFTs certainly carries risk, especially for these reasons:
- High volatility – NFTs values can fluctuate wildly.
- New assets – Little historical data exists on how most projects perform long-term.
- Limited regulation – No oversight means ample fraud and manipulation.
- Subjective value – Beauty is in the eye of the beholder, providing few price anchors.
However, the risks can be managed by only allocating a small portion of your portfolio to NFTs, sticking to more liquid assets, thoroughly researching purchases, and avoiding scams. For deeper pockets with higher risk tolerance, NFTs can provide exposure to potentially rewarding new blockchain use cases and technologies.
Should you buy NFTs?
Here are some pros and cons to consider when deciding if buying NFTs is right for you:
Pros
- Potential appreciation – Some NFTs gain significant value.
- Fun digital collectibles – Express your interests and identity.
- Access benefits – Some NFTs provide exclusives like games or events.
- Support artists – Compensate creators directly.
- New technology – Experience an emerging blockchain use case.
Cons
- High risk – Volatile assets with frequent scams.
- No intrinsic value – NFTs don’t provide cash flows or utility.
- Subjective value – Prices based on perception, not fundamentals.
- Limited secondary market – Can be hard to resell NFTs.
- Environmental impact – Blockchain has high energy consumption.
In summary, buying NFTs is risky but can be fine for some investors if approached carefully. Only invest what you can afford to lose, do thorough research, and make sure you genuinely enjoy the NFT assets apart from financial returns.
Conclusion
While the nascent NFT market is rife with fraud and manipulation, investors can avoid scams and purchase NFTs safely through research, vigilance, and using trusted platforms and sellers. Sticking to more liquid mainstream NFTs, not investing more than you can afford to lose, and viewing purchases as artistic patronage rather than profit-driven speculation can further mitigate the risks. NFTs offer an exciting new digital asset class, but educating yourself and exercising caution is essential to participate safely. With time the space will hopefully mature by weeding out bad actors and establishing more accountability.