With sales reaching approximately $ 17.6 billion in the United States in 2021, there was no shortage of people and businesses looking to take advantage of the rise in irreplaceable tokens (NFT).
And fraudsters are no exception.
NFT is a digital asset, usually a work of art protected by a blockchain, the same technology that underpins cryptocurrencies like bitcoin.
The price of NFT is largely determined by investor sentiment – many of which are considered useless, but some have set huge prices, such as Everydays – The First 5000 Days, by artist Beeple, which sold for more than $ 69 million in the US in March 2021
Christie’s is proud to offer “Every day – the first 5,000 days” from
< br>Learn more here pic.twitter.com/zymq2DSjy7
– @ ChristiesInc
The ownership of NFT must be indisputable, as the blockchain acts as a digital register that records and verifies every sale and purchase. However, despite being encrypted, NFTs are not completely secure, and in 2022 there is already a share of high-profile thefts.
In February, hackers launched a phishing attack on users of OpenSea, the world’s largest NFT market. The hackers targeted high-value tokens, including NFT from the Bored Ape Yacht Club virus collection. Estimates put the total value of NFT stolen in this breach at about $ 1.7 million.
Such big results are likely to continue, as fraudsters use the lack of regulation and mania behind the digital art movement to rob unsuspecting buyers. In fact, the anonymous nature of many NFT projects leaves victims with little protection.
While there are countless ways to lose money by investing in new and volatile assets, experts say many of the outright scams in the NFT sector fall into one of the following categories.
“Pull the carpet”
Carpet pulling is a form of fraud that promotes a fraudulent NFT project, usually through paid advertising and social media. The project promises exciting content and incredible returns for investors. Once the noise reaches a high temperature and investors’ money is poured out, fraudsters delete all social media accounts and abandon the project.
This is a scam that Marco Monardo is unfortunately aware of. When a resident of Oakville, Ont., Opened the Frosties NFT crypto project in December 2021, he thought he had hit the jackpot.
“I just thought it would be a quick way to get money,” Monardo said. “I would just buy this picture and someone will pay more for it in a few months.”
The project was based on the sale of NFT to “Frosties”, which are cartoon characters that look like ice cream balls. But the main reason investors were interested was the updates and benefits that the creators promised after their release, including gifts and a planned world of Frosties in the virtual space known as the metaverse.
After talking to investors through the project’s account on the Discord messaging platform, Monardo was convinced and invested $ 500.
Image of Frosties NFT, purchased by Ontario resident Marco Monardo. (Submitted by Marco Monardo)
“Their site was very professional,” he said. “Their Discord … had a bunch of members and [they had] thousands of followers on Twitter. “
In the week before its release, the creators of Frosties released constant updates, promising successful launches and new additions in the future, including the planned meta-universe game. They kept only the first promise.
“It’s been a few hours, everything is selling out, it looks good,” Monardo said. “And then the site just stopped, their Twitter stopped, and they just stopped all communication – and then everyone just assumed we were all cheated.”
In total, the carpet Frosties NFT deceived investors with more than $ 1.1 million. Pulling out carpets like this represents almost 40% of the revenue from crypto fraud in 2021.
Counterfeits and counterfeits
Like the fine arts market, NFT buyers must smell counterfeits and plagiarized works of true masterpieces. A good forgery of fine art can be expensive and difficult to produce, but counterfeit NFTs can be created at the touch of a button.
The problem became so serious that the NFT OpenSea market had to tighten controls on users’ ability to list NFT for free, noting that 80 percent of ads were plagiarized, fake collections or spam.
Recently, however, we have seen that abuse of this feature is growing exponentially.
Over 80% of the items created with this tool are plagiarized works, fake collections and spam.
– @open
This has also become a serious problem for digital artists, whose works are routinely stolen. Plagiarists patrol Instagram and Twitter, searching for digital art creators, and once they find a popular work, copy it and list it in the NFT markets.
The buyer not only receives a counterfeit product, but also the artist misses the revenue generated from the sale of NFT.
Pump and discard
A major stock market scam, pumping and dumping schemes are equally well known in the crypto universe. The premise is simple: a fraudster often buys a vague crypto token or NFT collection and advertises it to raise the price, then sells his share, leaving other investors to hold the bag when the price falls.
In January, a class action lawsuit was filed against reality star Kim Kardashian and boxer Floyd Mayweather over their involvement in pumping out the EthereumMax crypto token. Kardashian and Mayweather popularized the coin on social media, and Mayweather made it the official crypto sponsor of his long-awaited boxing match with the influential Logan Paul in June 2021.
Supported by approvals, the token rose 1,300 percent in value, at which point in the lawsuit it is alleged that EthereumMax executives withdrew money, unloading significant positions.
Since then, the price of EthereumMax has fallen, losing 99% of its value, leaving investors who bought the ad with an almost useless token.
Maria Paula Fernandez, co-founder of JPG Protocol, an organization dedicated to curating the NFT space, believes that crypto fraud is inevitable due to the large volume of projects launched on a daily basis.
“The rule is that if something looks too good, you should probably stay away,” she said. “Pump and discharge are inevitable.”
Fernandez warns buyers to be wary of NFT with anonymous development teams and instead look for projects with creators who have a history of honest work. She also recommends avoiding crypto projects that have unrealistic goals and promise investors a crazy return.
Long-term potential?
Despite the risks, Fernandez believes NFT could be an investment worthwhile.
“I think some of them are excellent,” she said. “I think they are both fantastic cultural instruments and financial instruments.”
Fernandez believes that the technology behind NFT will continue to evolve, leading to safer transactions for collectors and a higher attitude towards NFT as a means of storing value, to the point where they can be used as collateral for loans.
But for now, NFTs remain highly speculative and there are signs that the market is weakening significantly.
According to the NonFungible data resource website, NFT sales fell 50 percent in the first quarter of 2022. The average NFT price also fell to about $ 2,500, from $ 6,800 in January. As a result of declining demand, many NFT owners find that their valuable works already have significantly lower prices.
In March 2021, crypto entrepreneur Sina Estavi bought NFT on the first tweet of former Twitter CEO Jack Dorsey for $ 2.9 million. In April 2022, Estavi tried to sell the same NFT at auction for $ 48 million, pledging 50% of the proceeds to charity.
When the auction ended on April 13, Estavi had received only seven bids. The highest bid was only $ 280, which is a 99% loss in value.
I decided to sell this NFT (the world’s first tweet) and donate 50% of the proceeds ($ 25 million or more) to the charity
🖇 pic.twitter.com/yiaZjJt1p0
– @ sinaEstavi
Situations like this are not uncommon, given that the value of NFT is determined entirely by investor sentiment. For this reason, Fernandez recommends looking at NFTs with long-term focus and avoiding trying to turn them around to win quickly.
“It’s best to be careful – try to invest in NFT, which you think has real potential,” Fernandez said. “Stay away from turning. Some amazing technology is being built, but it won’t keep up with the pace of turning.”
For investors who remain disciplined and patient, there can be great rewards in the NFT space. But for buyers who have already burned out, it may not be worth the risk.
“I have not watched any [NFTs] at all after the Frosties, “said Monardo.” I guess I’d like more assurance that my money will be safe, but you can’t trust anyone with these things. At least not for me. ”
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