With sales reaching an estimated $17.6 billion in 2021, there was no shortage of people and companies looking to capitalize on the emergence of non-fungible tokens (NFTs).
And scammers are no exception.
NFT is a digital asset, usually a piece of art, secured through the blockchain, the same technology that supports cryptocurrencies like Bitcoin.
The price of NFT is largely driven by investor sentiment – many are seen as worthless, but some have charged huge prices, such as Every day – the first 5,000 daysBy artist Beeple that sold for more than $69 million in March 2021.
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The ownership of the NFT is supposed to be indisputable, with the blockchain acting as the digital ledger that records and verifies every purchase and sale. However, despite being encrypted, NFT is not completely secure, and 2022 has already seen its share of high-profile burglaries.
In February, hackers launched a phishing attack on users of OpenSea, the world’s largest NFT marketplace. The hackers targeted high-value tokens, including NFTs from the Bored Ape Yacht Club viral group. It is estimated that the total value of NFTs stolen in this breach is approximately US$1.7 million.
Such big hits are likely to continue as scam artists exploit the lack of regulation and obsession behind the digital art movement to steal unsuspecting buyers. In fact, the anonymous nature of many NFT projects leaves victims with few avenues of redress.
While there are countless ways to lose money investing in new and volatile assets, experts say that many outright NFT scams fall into one of the following categories.
Rug pulls are a form of fraud in which a fraudulent NFT project is promoted, usually via paid advertising and social media. The project promises exciting content and incredible returns for investors. After the hype reached fever pitch and investors’ money poured in, the scammers delete any social media accounts and abandon the project.
It’s a trick Marco Monardo is sad to know. When resident Oakville, Ont. discovered the Frosties NFT crypto project in December 2021, he thought it had hit the jackpot.
“I thought it would be a quick way to make money,” Monardo said. “I’m just going to buy this picture and someone will pay more for it a few months from now.”
The project was based on selling NFTs from “Frosties,” cartoon characters that look like scoops of ice cream. But the main reason investors were interested was the updates and perks that the creators promised after the release, including gifts and a planned Frosties world in the virtual space known as the metaverse.
After speaking to investors through the project’s account on the messaging platform Discord, Monardo was convinced and invested $500.
“Their location was very professional,” he said. “Discord… He had a group of members and [they had] Thousands of followers on Twitter.
In the week leading up to the release, Frosties’ creators provided ongoing updates, vowing a successful launch and new additions on the way, including a planned metaverse. They only fulfilled the first promise.
“A few hours go by, everything is running out, that looks good,” Monardo said. “Then the site just went down, their Twitter went down and they turned off all communications — and then everyone kind of assumed we were being scammed.”
In total, the Frosties NFT rug pull has swindled its investors out of more than $1.1 million USD. Withdrawals like this accounted for nearly 40 percent of revenue generated by cryptocurrency scams in 2021.
Counterfeit and imitation products
As in the fine art market, buyers of NFTs have to sniff out fakes and stolen originals. Good fine art forgeries can be expensive and difficult to produce, but fake NFTs can be created with the click of a button.
The problem got so bad that the OpenSea Marketplace for NFTs had to put strict controls on users’ ability to list NFTs for free, noting that 80 percent of listings were plagiarism, fake kits, or spam.
However, we have recently seen an increase in the abuse of this feature significantly.
More than 80% of the items created with this tool were plagiarism, fake groups, and spam.
This has also become a major problem for digital artists whose work is routinely stolen. Plagiarism patrols Instagram and Twitter for digital art creators, and once you find a famous piece of art, copy it and list it on NFT Markets.
Not only does the buyer receive a counterfeit, but the artist also loses the revenue from the sale of NFT.
Pumps & Dumps
Basic stock market scam and pump-and-dump schemes are equally prominent in the crypto world. The premise is simple: the fraudster buys an often-obfuscated crypto-token or NFT set and raises it to raise the price, after which they sell their stake, leaving other investors holding the bag when the price drops.
In January, a class action lawsuit was filed against reality star Kim Kardashian and boxer Floyd Mayweather for their involvement in the EthereumMax cryptocurrency injection. Kardashian and Mayweather promoted the coin on social media and Mayweather made it the official cryptocurrency sponsor for his much-anticipated boxing match with influencer Logan Paul in June 2021.
Buoyed by the endorsement, the value of the token rose by 1,300 percent, at which point the lawsuit alleges that EthereumMax executives cashed in, emptying their large positions.
The price of EthereumMax has since plummeted, losing 99 percent of its value, leaving investors who have bought into the hype a nearly worthless token.
Maria Paula Fernandez, co-founder of JPG Protocol, an organization dedicated to nurturing the NFT space, believes crypto scams are inevitable due to the sheer volume of projects being released every day.
“The general rule is that if something looks too good to be true, you should probably stay away from it,” she said. “Pumps and tailings is inevitable.”
Fernandez cautions buyers to be wary of NFTs with anonymous development teams and instead look for projects with creators who have a history of honest work. It also recommends avoiding crypto projects that have unrealistic goals and promise investors insane returns.
Long term potential?
Despite the risks, Fernandez believes NFTs can be worthwhile investments.
“I think some of them are excellent,” she said. “I think they’re great cultural tools as well as financial tools.”
Fernandez believes that the technology behind NFTs will continue to evolve, leading to more secure transactions for collectors and greater attention to NFTs as a store of value, to the point where they can be used as collateral for loans.
But for now, NFTs are still very speculative and there are signs that the market is weakening significantly.
According to data resource site NonFungible, NFT sales volumes fell 50 percent in the first quarter of 2022. The average price of a NFT also fell to about $2,500, down from $6,800 in January. As a result of dwindling demand, many NFT owners are finding that their prized business now requires much lower price tags.
In March 2021, crypto entrepreneur Sina Estafi purchased NFT’s first tweet from former Twitter CEO Jack Dorsey for $2.9 million. In April 2022, Estavi attempted to auction the same NFT for $48 million, pledging 50 percent of the proceeds to charity.
When the auction closed on April 13, Estavi had received only seven bids. The highest bid was only $280, which is a 99 percent loss in value.
Such situations are not uncommon, given that the value of NFT is driven entirely by investor sentiment. For this reason, Fernandez recommends looking at NFTs with a long-term focus and avoiding trying to flip them for a quick buck.
“You’d better be careful – try investing in an NFT that you think has real potential,” Fernandez said. “Stay away from flipping. There are some amazing technologies being built, but they won’t keep up with the pace of flipping.”
For investors who maintain discipline and patience, there may be great rewards ahead in the field of NFT. But for buyers who have already gotten burned, it may not be worth the risk.
“I didn’t look at anything [NFTs] Ever since Frosties, Monardo said. “I guess I want more assurance that my money will be safe, but you can’t trust anyone with these things. Not for me at least.”