Do you want to know about the risks associated with NFTs? This article is all about all the possible risks you can encounter with NFTs.
Before you continue, click here to know more about NFTs and Cryptocurrencies.
Now, the growing popularity of NFTs makes it necessary to understand what the risks and safeguards are for users and those interested in investing in NFTs in the future.
Well, below, we try to list and explain some of the risks associated with NFTs, they include;
- The risk of the Ponzi scheme
- The risks of MLM (multiLevel marketing)
- The risks of Wash trading on NFT
- The buy and sell risks
1. The Risk Of The Ponzi Scheme
Like all investments in regulated markets with little or no regulation, even those in NFT present various risks.
Specifically for NFTs, many of these risks can be compared with those of typical investments in works of art.
They range from the problem of authenticity to that of copyright and subsequently, from the value over time of the investment (often linked to unpredictable and subjective) to any concrete relationship with the artwork connected to the token, be it digital or physical.
However, several observers have also highlighted the risk of creating pyramid schemes, better known as Ponzi schemes, which could create speculative bubbles and substantial losses.
In this regard, the risk is present, but it is not too specific due to some typical characteristics of NFTs.
What Is A Ponzi Scheme?
The typical Ponzi scheme works more or less like this. A person creates a fund and issues units on the market that are subscribed to by various investors.
Instead of repaying investors with investment results, the pyramid scheme uses the resources that come from new subscriptions.
The more successful the fund is, the more new investments are rained that remunerate old investors, starting from the top of the pyramid and therefore gradually lower up to the most recent.
However, when subscriptions drop or some real investment goes wrong, the toy breaks and the truth emerges overwhelmingly as in the famous case of Bernie Madoff.
Even in the crypto world, gigantic Ponzi schemes have been seen, such as that of OneCoin with which the Bulgarian criminal Ruzha Ignatova stole 5 billion dollars before disappearing. Then there were the cases of BitConnect and PlusToken.
There are many more cases of fraud, however.
Also, the Washington Post has even listed six signs to warn, those signs include; implausible returns (for example, 1% per day), promoters who flaunt a high lifestyle, proprietary secrets that block transparency on instruments, pushed to proselytism, participants boasting strong earnings, and the difficulty of liquidating investments at some point.
How The Ponzi Scheme Risk Relate With NFTs
As for NFTs, there are tools that have some characteristics favorable to the creation of Ponzi schemes and other characteristics that instead hinder them.
NFTs are difficult to value (like a work of art in many cases), they can provide very high returns at the beginning, they have a still vague and uncertain regulation, and they are new and therefore less known and easier to use to process scams.
At the same time, however, the NFTs are by definition unique (even if the buyer will have to carry out all the necessary checks) they are therefore not fungible like the shares of a fund that hides in a Ponzi scheme.
The life cycle of an NFT normally goes from the creator (artist) to the seller (auction house and the like), and then to the buyer (investor).
2. The Risks Of MLM (MultiLevel Marketing)
One of the other risks associated with NFTs is the risk of MLM (multiLevel marketing).
It is another controversial sales practice that consists of a distribution system in which a company not only sells its products to customers but encourages them to sell the products in return for gains.
This scheme makes it possible to develop a chain in which a substantial part of the profits moves upwards, while the greatest pressures insist on the base.
It can also happen in the world of NFTs, for example in the case of those particular collectibles called PFP NFTs.
PFP is the acronym for Photo For Profile, i.e. profile image, and recently several images of this type, i.e. real avatars, have absorbed an important part of the NFT market, as in the case of the series called CryptoPunks, Bored Ape Yacht Club.
The success of these profiles has generated a strong market that has been fed, as often happens, by the prestige associated with certain successful NFTs or by the fear of being cut off from a trend (FOMO). All this has triggered mechanisms similar to multilevel marketing in the sale of these NFTs.
Whenever a trend is born and spreads, the danger of multilevel marketing mechanisms, pyramid schemes, speculation, and scams arises. The NFT world obviously runs these dangers too.
3. The Risks Of Wash Trading On NFT
Another risk when buying NFTs is that of an illegal price manipulation practice: it is the phenomenon of wash trading, an operation put together by some sellers to fictitiously increase the value of an NFT.
In practice, the seller sells the digital asset to himself, transferring it to another proprietary wallet: in this way the value of the NFT is illegally inflated, leading prospective users to believe that it is an object with speculative potential.
For a market that, although in decline, recorded transactions for over 44 billion dollars in 2021, the danger is real.
According to Chainalysis, about $ 8.9 million in profit was made from NFT’s “wash trading” activities during 2021.
4. The Buy And Sell Risks
The lack of regulation of the NFT market also leads to the participation of fraudsters and speculators among investors.
Those who approach the world of NFT for the first time must therefore follow some rules:
- The value of NFTs fluctuates over time: the investor must therefore not be carried away by the market trend but must be aware of the investment objective.
- Choose the marketplaces considered safer and more regulated.
- Open secure wallets and pay attention to storing NFTs in multiple wallets protected with advanced cryptographic systems.
- Read up on the NFT of interest, checking the community of enthusiasts.
- Beware of phishing, links, emails, or fraudulent messages that trick users into sharing sensitive information that can pave way for easy access to the wallet in order to steal NFTs.
Risks Associated With NFTs – Conclusion
You should be aware that just as there are many risks associated with a lot of stuff online is the same way there are some risks associated with NFTs. Yes, do not let this amaze you!
You will be safe if you follow the instructions described above appropriately. We hope you have a nice experience in your journey through making profits with NFTs.
Comment below, we will be glad to see your take on this.
You Can Also Read: