In a seemingly innocuous Tweet made on January 27th, 2022, the world’s leading NFT marketplace OpenSea openly admitted that 80% of the NFTs minted using its free creation tool were plagiarized, fake, or scams:
After hearing a collective gasp from millions of users and media outlets, the company attempted to walk back and clarify their statement:
Even though OpenSea’s “correction” sounds much less alarming, both Tweets share a common thread and reveal an uncomfortable truth about NFTs:
Scammers are flooding into the market.
According to a report by Chainalysis, crime within the digital asset economy reached an all-time high of $14 billion in 2021. And now that NFTs alone have surpassed $25 billion in annual trading volume, cybercriminals have a fresh pool of targets.
Scams like wash trading, forgeries, and rug pulls have become so “rampant” that marketplace Cent has suspended operations until they can find a sustainable solution.
So what are the most common scams plaguing the NFT economy? Why are NFTs especially vulnerable? And which illicit scheme from the Great Depression is making an ignominious comeback?
Let’s investigate NFT scams.
First, What Are NFTs?
To understand why NFTs are so rife with scams, it helps to know a bit more about what they are and how they function.
NFTs are like “certificates of ownership” of digital art
Let’s say you’re a digital artist. How do you sell one of your “original” works? Painters can sell a physical painting, sculptors a statue, but you? Your art is just lines of code. You can sell licenses, but not a high-priced original, so you’re at a disadvantage.
NFTs change all that. When you “mint” an NFT on a marketplace like OpenSea, you’re converting one of your works into a one-of-a-kind digital asset stored on the Ethereum blockchain. You can then sell that asset as an “original” for a high price to supporters, collectors, or investors.
Figuratively speaking, an NFT amounts to little more than a line of code on the blockchain that says “Joe Schmo owns Nyan Cat.”
That’s it. No license, no JPG, nothing to hang on a wall. Just bragging rights. People by NFTs for a number of reasons, including to support indie artists, for the joy of art collecting, to access bonuses, and for sheer bragging rights. And ofcourse, some people buy NFTs as an investment.
Read more: What Is an NFT?
Why Are NFTs So Vulnerable to Scams?
Similar to how mosquitos like moisture, scammers tend to prosper and multiply in markets that have:
- Tons of money changing hands quickly,
- Zero regulatory oversight, and
- A standard of anonymity
160 years ago that was the California Gold Rush. Today, it’s the blockchain.
And it’s not the blockchain’s fault. The blockchain itself has never been hacked or stolen from. It’s our connection points to the blockchain that are so vulnerable.
To illustrate, private keys are still a single point of failure. And right up until very recently, absolutely anyone could copy a JPG of a famous piece of art, mint it as an NFT, and sell it under the artist’s name.
And as we’ll see below, that’s exactly what some people did.
6 Common NFT Scams (And How to Avoid Them)
Here’s a list of some of the most common NFT scams, in rough order of prevalence.
1. Fakes And Forgeries
I’m not gonna lie; even I couldn’t resist the temptation to own a Banksy NFT. Not only would I mention it in every conversation until I had no friends left, I’d genuinely consider it part of my investment portfolio.
Because if any NFT were to appreciate in value, it would be one of Banksy’s.
So long as, you know, it was real.
Sadly for a handful of eager buyers, the first wave of Banksy NFTs were decidedly not real. One NFT dubbed “NFT Morons” sold for 34 ETH, or $68,000 at the time:
Although the fake Banksy NFTs have achieved novelty status, today’s values are several digits behind their initial sale prices. One could argue that the minter, Pest Control, taught us a valuable lesson.
Avoid them by: Verifying as much as you can with the original artist. It’s exceedingly rare for an artist to list their NFTs for sale without hyping them up as much as possible, or at least mentioning them somewhere using an account that they control.
So if you discover an NFT collection by your favorite artist without the accompanying fanfare and marketing, that’s a red flag. It’s also a good time to ask them directly. You may just help ring the alarm for them and all of their other fans:
Tools are also emerging to help NFT buyers spot frauds. Check out Adobe Content Credentials, which is currently in beta (but looking promising).
2. Fake Marketplaces
Certain hackers have gotten so bold that they’ve even generated entire fake marketplaces for minting and selling NFTs. In a bid to dupe unsuspecting investors, they’ll list name-brand NFTs like Bored Ape Yacht Club for well under market price–and happily take your ETH.
They may not even wait for you to make a “purchase.” Some fake marketplaces require you to link your crypto wallet upfront, and simply use that information to drain your account.
Avoid them by: Sticking with the major marketplaces, and ensuring the URL checks out. Here are their names and verified URLs
3. Phishing for Private Keys
One of the greatest weaknesses of crypto, NFTs, and the digital asset economy as a whole is the use of private keys. They’re a single point of failure in an otherwise well-made machine. With your private key exposed, it’s game over. Anyone can drain your account in seconds.
That’s why bad guys love coming up with clever ways to trick you into sharing your private key. They’ll pose as customer service reps, offer to send you free crypto, or pretend to help you through a technical issue on Discord–-all in an insidious attempt to get you to hand over the keys to the castle.
Avoid them by: Never ever, ever, ever sharing your private keys. Ever. If someone asks for your private keys, they’re 100% a scammer.
4. Rug Pulls
A rug pull is the crypto/NFT equivalent of a classic Wall Street pump-and-dump scheme.
But while pumping and dumping at least leaves some liquidity in the pool, rug pulls typically devalue the digital asset by 100%, leaving investors totally screwed.
A rug pull occurs when the developer of a digital asset makes big promises (creating a tie-in game, redistributing profits, etc.) to lure in investors and preorders. They take the money, cease development of the project, and disappear. Recent high-profile cases include the Squid Game crypto, the Frosties NFT collection, and Cool Kittens.
They’re like Kickstarter campaigns that keep the money but never deliver.
Avoid them by: Vetting promising crypto/NFT projects with a skeptical eye. Ignore the social media hype. ID the developers, look at their history and integration into the community, and follow your gut.
Rug pulls can be hard to spot before they happen, but if you have a bad feeling, trust it and keep your money.
5. NFT Wash Trading
In a traditional sense, wash trading occurs when a broker and a trader buy and sell an asset back and forth to create the illusion of demand and illicitly pump values.
Wash trading is an old-as-dirt price manipulation tactic that was banned with the passage of the Commodity Exchange Act of 1936. Even still, the digital asset economy is so lawless and unregulated that even Depression-era scams are making a comeback.
Plus, the technology behind digital asset sales has made wash trading easier than ever. All you need to do is create two crypto wallets and sell your NFTs to yourself. Do this a few times and it appears that your NFTs are in high demand.
Some celebrities have even been accused of wash trading just to save face after their NFT sales flopped. I won’t name names, but a Bloomberg investigation recently uncovered that the wallet that purchased a certain former first lady’s NFTs could be linked right back to her.
Avoid it by: Looking for the age-old signs of wash trading. If the OpenSea trade history shows a high volume of buys between the same two or three wallets, especially if it’s within a short window of time, that’s a red flag.
6. Marketplace Hacks
Hacks aren’t exactly scams, per se, but they’re a rising threat to NFT buyers and therefore deserve a mention.
You might’ve read about the recent high-profile hack of OpenSea, during which a single hacker yanked millions worth of NFTs right from investors’ wallets.
But at the time of this writing, the most interesting part of the story is how nobody can agree on how much was stolen, how it was stolen, or even the number of users affected.
- Victims and certain outlets claim that over $200 million worth of art was stolen from 32 users, and blame OpenSea for leaving a back door open.
- OpenSea, meanwhile, estimates the missing NFTs to be worth “just” $1.7 million, reduced the number of victims from 32 to 15, and claim that their security is airtight; the victims all just fell for the same phishing scam.
If the rising trends in crypto-related crime are any indicator, this won’t be the last high-profile hack we see this year.
Avoid them by: Storing your NFTs in a cold wallet. Although the chances that your NFTs will be lifted straight from your hot wallet are extremely slim, a real world chance exists.
Storing your private keys offline in a hard drive or USB stick locked in a safe is the only foolproof way to foil digital art thieves.
Find out more >>> The Best Cryptocurrency Wallets
How Do NFT Scams Impact Investors?
It’s hard to say how the rise in NFT-related scams will affect the overall market.
Traditionally, anything that undermines investor confidence leads to less trading volume and falling prices. In the crypto world, when Tesla announced it would no longer accept Bitcoin due to environmental concerns, prices plummeted.
But NFTs are non-fungible, meaning the sale of a CryptoPunk NFT won’t directly impact the value of other NFTs. Relative to other asset classes, the values of NFTs are pretty siloed and insulated against each other.
The other way increased crime can lead to falling prices is when it attracts increased regulation. When China announced a fresh round of crackdowns in June of 2021, crypto prices fell 22% overnight.
But the SEC only steps in to prevent securities fraud, and as far as they’re concerned, NFTs aren’t securities.
The final factor to consider is the flood of companies like Ubisoft and Meta entering the NFT market. When powerful corporations moved out West in the 19th century, they brought law and order with them. We’re likely to see a well-protected railroad being laid into the NFT space, as well.
So will NFT scams hurt prices in the short- or long-term? I doubt it. Judging by trading volume alone, this train can’t be stopped.
The Bottom Line
The #1 rule when it comes to buying NFTs is DYOR (do your own research). Be skeptical. Try to prove to yourself that this NFT is a scam by using the tools and watchdog techniques above.
If you can’t prove it, reconsider why you’re buying it in the first place. Is it to support an artist? Sheer joy? Access to an exclusive opportunity or event, like getting froyo with Gary Vaynerchuck?
Go for it.
But if you’re considering NFTs as an investment, don’t let the threat of scams stop you.
Find out more >>> How to Invest in NFTs