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Factors to Consider Before Investing in NFTs

The current mania surrounding NFT’s will surely raise plenty of eyebrows. Before you dive headfirst into investing, be aware that scams are as common as the promises of profit. In fact, Daniel Watson, an expert in the manner hailing from New Zealand, went as far as to liken the completely unregulated NFT market to a giant Ponzi scheme. Daniel notes that it’s not uncommon for organized crime to hype-up the NFT market with paid advertising and social media campaigns which feature stories of people getting rich off the “tremendous” value of these digital assets. Unfortunately, what fails to be shared is the volatile and completely speculative nature of the value of these assets, as well as the stunning frequency with which the rug gets pulled out from under unsuspecting investors. Often this occurs when NFT projects are abruptly abandoned after the “developers” secure the investors’ money and then disappear, taking the illicitly earned cash with them. Perhaps the most infamous example of this is the SQUID token scam, based off the popular Netflix series. The token surged in price as the hype around it grew and even more investors bought in. However, when investors tried to cash in, they were unable to sell and the SQUID token developers siphoned out $3.3 million dollars worth of investments, leaving the token worthless.

Additionally, and regardless of whether blockchain verifies your ownership, there’s often nothing to stop someone from downloading a copy of the NFT after clicking on a link. The last thing you want is for your investment to end up being a worthless JPG file. While NFT’s are not all doom and gloom, of course, it’s important to be aware of the risks which accompany them, and how you can avoid falling victim to bad actors.

Understanding the laws governing NFTs and their financial liability may be the key to protecting your investment. Not unlike cyber security, NFTs require frequent and significant improvements to keep them secure. Treated as financial instruments, like cryptocurrency, NFTs are often  regulated with a rapidly changing balance of laws. Unexpected fines and seizures can result for both buyers and sellers if the rules are not understood and adhered to fully. According to IRS rules, NFTs are considered assets, not currency or just a piece of art. This means they are subject to capital gains tax and all exchanges must comply with this rule. Additionally, reputable exchanges should be used for all transactions. Its critical to keep tabs on the ever-changing rules the government applies to these exchanges, in their ongoing effort to regulate the market.

NFT theft is a very real and significant issue, so protecting your NFT wallet should be top of mind. NFTs are essentially cryptocurrencies, meaning their security can be viewed in the same light as cryptocurrency wallets. With this in mind, there are three main factors which go into maintaining a well-protected crypto wallet:

  1. Owners must keep their credentials secure and deploy multi-factor authentication as part of good digital hygiene practices.
  2. Your wallet must have backups, such as an external hard drive where physical data can be stored.
  3. High quality cyber security tools should be present on any device utilized for cryptocurrency sales, with a minimum of a firewall and anti-virus measures. VPN is also a great way to keep your network safe by ensuring your data will be more difficult to steal, thanks to end-to-end encryption. VPNs can be deployed across your entire network with the use of a router.

NFTs are still a new concept and thus you can expect there to be some obstacles that must be overcome. Updates will prove to play a crucial role in a successful anti-malware system. User awareness and teams of dedicated programmers are the key to preventing vulnerabilities from being exploited. A proactive approach must be taken to stay a step ahead of criminals and patch vulnerabilities before wide-scale thefts of NFTs occur or a degradation of overall market assurance takes place. In essence, NFT protection should be treated in the same way you would protect any other digital financial asset. Likening NFTs to art can cause confusion in terms of how you protect your asset against bad actors. Instead, NFTs should be treated like cryptocurrency, which is their source technology. Adopting this approach will yield better results when it comes to retaining protections and ensuring security against hackers.

Given all these cautionary tales and cyber security factors, what should you take away from this blog if you are still eager to make an investment in NFTs?

  • First, proceed with caution. We don’t want to discourage anyone from investing but it’s important to know scams are common. With over 10,000 cryptocurrencies and countless NFTs it’s nearly impossible to regulate them all. People are falling victim to scams daily and you must be willing to live with the fact some risk will be involved when entering the market.
  • Next, and most importantly, do your research. Make sure you have a good understanding of how NFTs work, so that you aren’t throwing money around randomly because FOMO. A few questions to ask yourself before pulling the trigger on an investment include:
    • “What kind of problem does the blockchain solve?”
    • “Who is the vendor and what is their reputation?
    • “Have they participated in previous projects? If so, how did those projects end up?”
      • If the blockchain doesn’t solve a problem, it’s probably best to avoid it and if you are struggling to find any positive information on the vendor that is another red flag.
  • Finally, you should never invest more than you can afford to lose. With apologies to Nike and Michael Jordan, if you can’t afford to lose everything you are investing, “Just *Don’t* Do It.”


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