Why are there so many scammers in the NFT space and what can be done about it?
Seasoned entertainer and all-around showbiz royalty WC Fields once said, “It’s morally wrong to allow a sucker to keep his money.” And many operators in the NFT space have kept to his not-so-moral advice by fleecing investors of their hard-earned cash. There is always a lot happening In the Wild West of NFTs. And it’s only getting crazier as the interest from investors heats up. And so too does the prevalence of NFT scams.
Did you hear the recent confession Opensea made on Twitter about the number of NFT scams on its platform? Turns out that 80% of the NFTs minted with their lazy minting tool were either fake or straight out NFT scams!
Wait a minute. I just scammed you.
Well, sort of.
The company did say this, but they later had to clarify what they meant to say. Which was that 80% of the NFTs they are forced to remove for violating the T’s & C’s have been lazy minted. Which is an interesting difference. Because it shows a couple of things:
- 4 out of 5 lazy minted NFTs are not scams.
- The company is active when it comes to getting rid of NFT scams from its platform.
However, this doesn’t negate the fact that the NFT industry is especially prone to scams. But why? — I hear you ask.
Let me explain.
Why is the NFT market so susceptible to NFT scams?
Like cockroaches need trash, scammers need anonymity to thrive. Let’s think about the defining characteristics of the NFT space:
- A lot of hopeful investors looking to get rich.
- Zero regulations.
- Anonymity has become the industry standard.
Fertile conditions for NFT scams, wouldn’t you agree? Anytime a major event, trend, or breakthrough occurs, there are unscrupulous operators looking to make easy money by getting you to part with yours. Think about it: in the second half of the 19th-century, snake oil salesmen charmed naïve buyers out of their money by promising them wondrous cures and delivering very little.
And it seems that history is repeating today on the blockchain.
There are a lot of hype men (and women) out there propagating the notion that the value of their NFT is about to go to the moon. Without any substance. Or without a viable product either, in many cases.
Let’s look at how NFT scammers pull the wool on their unsuspecting victims.
Classic NFT scams
Classic rug pull NFT scams work like this: create insane hype about your NFT project and gain a following of keen investors. Promise them the moon and wait until your project sells out. Once this happens you pull the plug on the whole shebang. Delete everything and disappear with all your investors’ cash. This could be quite a considerable sum given that there are really no overheads involved in pulling these types of NFT scams and that you could potentially sell say a run of 10,000 NFTs for a modest $130 each. Which would equate to $1.3 million total. Not bad for a few months of hype building. This is exactly what happened recently in the case of the Frosties NFT scam.
The Frosties NFT scam involved the scammers promising their eager followers amazing future growth and development, only to pull the rug from underneath their feet once the project sold out. The two fraudsters, Ethan Nguyen and Andre Llacuna, then allegedly shut the entire project down. They then allegedly transferred about $1.1 million in proceeds via several crypto wallets to cover their tracks. I say allegedly because their case is yet to be heard before a judge. If convicted, the pair face up to 20 years’ jail time. Not the outcome the two 20-year-olds were expecting, I’m sure. But like moths to a flame, the temptation of lots of fast money freely exchanging hands in the NFT scene proved too great for the pair to resist. And they got burnt.
Master forgers in the world of art spend many years practicing their craft. They hone and sharpen their skills to the point where they can trick the experts into thinking their fakeries are the authentic item. Or they get caught out and gain a reputation as a renowned counterfeiter with their shonky artwork becoming highly valued and collectible. Not so in the world of NFTs.
What the NFT forgers do is get out ahead of real artists by minting their real-life artworks as NFTs. Then it’s simply a matter of hitting NFT marketplaces with the dodgy artworks and passing them off as their own. This is exactly what happened to Netherlands-based digital artist Lois van Baarle. She recently took to Twitter to report her frustration upon discovering 132 of her original artworks had been minted on Opensea without her permission. Another interesting case of NFT forgery was the NFT Morons piece, purportedly by Banksy, which featured the very ironic quip “I can’t believe you morons actually buy this [expletive]”. The piece originally sold for around $68,000 to one unlucky bidder. The only problem? It held no more value than novelty status as a dodgy PNG in the style of the enigmatic street artist.
When making a copy of a rare and highly prized NFT is never further than a right mouse click + ‘Save image as’, what is stopping today’s NFT forgers from passing off another’s work as their own? Put simply, the blockchain.
The reason experts like Gary Vee love NFTs is because of the technological innovation they represent. Not only do they confer verifiable title to their owner via their location on the blockchain. They are also immutable. The blockchain can never be hacked or edited. This means when you own something that’s stored on the blockchain it’s there forever.
Pump and dump
Pump and dump (or P&D) scams didn’t start with NFTs. This scheme became the go-to ploy amongst certain notorious penny stock traders in the 1990s who would use it to artificially inflate the value of the stock they owned before dumping the lot on unsuspecting buyers. These scams allow the fraudsters to accrue massive profits quickly off the back of selling a ton of overpriced shares, leaving their hapless investors with worthless stock. And, unfortunately, P&D NFT scams are rife within the industry. Is that because of the industry’s reliance on influencers and hype? Or because the anonymity that is built into the system makes people susceptible because it’s very hard to #DYOR (do your own research)? I would say it’s a blend of both.
Let’s talk about a recent example to illustrate this point.
Major hip hop artists have been quick to jump on the NFT cash train. And it looks like several have been railroading fans into buying worthless digital tokens. Post Malone’s teaming up with the Ethereum-backed coin Fyooz saw his fans compelled to buy 50 of the cryptocurrency $FYZNFT. This could then be exchanged for an ‘NFT event’ — a chance to play beer pong against the heavily-tattooed rapper and beer lover. The only caveat? The so-called Celebrity World Pong League NFT cost around $1,000 total to procure. And the coin is now all but obsolete. Did the Post man just deliver his fans a classic P&D NFT scam?
How NFT scams are hurting mainstream adoption
With titles such as “NFT Scams are Everywhere”, “The Evil Business of NFTs”, and “The NFT Bubble Has Already Burst” there is an abundance of video content on YouTube warning potential investors off NFT trading. Consensus thinking regards the NFT water to be already too muddied with fakes, forgeries and fraudsters that divining what is real from what is fake, and what is valuable from what is junk, is near impossible for the honest investor.
And even though NFTs are gaining traction, and a lot of it, there is still the widespread myth amongst the uninitiated that NFTs are at best a little scammy and at worst no more than overpriced jpegs. When you read reports about how total NFT sales totaled more than $17 billion in 2021 alone, you can be forgiven for thinking that we have reached peak adoption of the technology. But what if I were to tell you that we are still very much in the early days and that the value of NFTs right now is only its floor price? You would probably ask me what I am basing this assumption on.
When we are spending the majority of our waking hours ensconced in the virtual world that is the Metaverse, NFTs will become the default digital world currency. Rendering physical cash redundant, the Metaverse will instead rely on a digitized, trusted, and verifiable currency that people can use to unlock virtual experiences and purchase digital assets. Namely, everyone will be using NFTs for everything. This means we are now still only in the early days of the technology’s proliferation.
So, when the general public constantly hears the words ‘NFT’ and ‘scam’ used in the same sentence, this hurts widespread adoption. And it also fails to accurately represent the technology’s potential to effect revolutionary change. Which is good news for early adopters.
Savvy investors, like Twitch co-founder Justin Kan, say to believe all the hype when it comes to how big the NFT industry will soon become. That’s why it serves your best interests to get some serious skin in the game now before the rest of the planet rocks up. And the first point you need to understand when making a shrewd investment choice is how to avoid getting scammed.
As much as possible, you need to do your own research before you buy. Not to the point of inaction and missing an opportunity, but it pays to be skeptical. The one and only Gary Vee recommends pouring in at least 50 hours of your own time researching an NFT before pulling the trigger. And what you need to be looking at are the 3 C’s. Who are the creators? What is happening in the community? And what is in the contract?
1. The creator/s
Ideally, you should be able to tell who the actual humans are behind the NFT project. And that they offer a reputable, proven track record of creating value for investors. If you cannot glean this info when doing your own research, it’s best to approach the entire project with caution. Looking at a project’s roadmap might give you a good idea of where the creator/s want to take their NFT, but at the end of the day, it’s little more than an aspiration. What really matters is the person behind the project. Essentially, you are investing in them and their ability to deliver what they have planned. Whether or not an NFT project is ultimately successful comes down to the ability of its creator/s to drive it forward.
2. The community
Get a handle on the type of people already invested in the project. Are they open to answering questions? Do they seem like thoughtful investors or hypesters? Check out the project’s Discord, Twitter or YouTube channel. A good NFT community will share a positive perspective toward the NFT project, the creator/s, as well as the future potential for growth. Any questions you have about the NFT should always be answered with transparency by the community members. And doing so is a good approach that will help you better #DYOR. If a project’s feed is characterized by posts demanding retweets, votes, and shares from the community, it’s probably best to stay away. You’ll probably find all that will happen at best is small gains over the short term.
3. The contract
If you are satisfied so far in terms of the NFT’s creator and community, you can go one step further and look at what the actual smart contract on offer entitles you to. Not every NFT for sale will utilize smart contracts. Simply purchasing artworks or collectible digital assets can occur without a smart contract. However, some NFTs can confer actual utility upon investors, such as access to special events. In these circumstances, the NFT will come with a particular set of T’s & C’s. Finding out the actual terms and conditions attached to an NFT sale will help you to decide whether there is real value to be had.
NFT scams might be rife but not every NFT is a scam. In fact, they offer greater legitimacy than most other assets. Not only does transacting with NFTs remove the unnecessary intervention and oversight by third party financial institutions, but it also offers more security than money left in the bank for inflation to eat into. Just because they don’t exist in a physical form doesn’t mean they are of invisible value. Plus, as the industry expands and matures, plenty of NFTs will bestow real-world benefits and experiences upon their owners. For these reasons, I am bullish on NFTs and their ability to revolutionize how humans exchange value.
That is not to say that you should rush headlong into buying the next popular NFT simply because everyone else is seemingly doing so. When doing your own research there are a set of best practices you should follow to minimize the risk of falling prey to scammers. They are as follows:
- Never invest more than you can afford to lose. Invest small amounts of your hard-earned cash over a longer period. This will help offset the risk, but not your potential for ROI.
- Patience grasshopper. Learning the skill of patience is key right now in a market flooded with the next big things in NFTs. Even if the floor price of an NFT is upwardly mobile, take your time and #DYOR.
- Be skeptical. Take everything with a grain of salt. Analyze the message and not just the source. Just because a so-called expert is into something and telling you to do the same does not guarantee it will prove a profitable investment.
- Find your people. By joining a community you can get a feel for whether the talk around the project is positive or not. Ask questions, seek help, gain knowledge. Gaining just one insight about a project could be well worth your time.
- Beware the dreaded FOMO disease. Avoid becoming another investor infected by a fear of missing out. This affliction can be brought on by several factors, such as hype, influencers, limited availability, as well as a surging floor price. If you see these things just remember that they are all classic psychological tricks used to induce people into a state of fear thinking that they must make a quick purchase now to avoid missing out on all the profits!
NFTs are not a scam when they’re done right. The technological breakthrough that NFTs represents creates a heap of value for humanity moving forward. It’s just a matter of finding the right NFT project for you that will create value and help move your financial dreams forward.
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