Wherever there is money, there will be financial scams. That’s a sad fact of life and one that is inescapable. Any new financial trend or product that appears will eventually be the target of scammers, and that includes non-fungible tokens, or NFTs.
At Addition Financial, we take our responsibility to our valued members very seriously, particularly when it comes to scams. It’s essential to have the right information if you want to be able to differentiate between legitimate investment opportunities and products and fakes that will take your money and negatively impact your financial future.
Since NFT scams have been getting a lot of attention in the news, we’ve created this list of 6 examples of NFT scams, plus some tips on how to avoid them. Here’s what you need to know.
NFT scams and cryptocurrency scams are common. According to an NBC report, scammers stole more than $14 billion from cryptocurrency and NFT investors in 2021 and that number will increase in 2022 unless consumers understand NFT scams and how to avoid them.
An NFT scam can take a variety of forms, but all of them have one thing in common: they’re designed to part you, the consumer, from your money. A scam may be a misrepresentation of an NFT’s value, or a successful hacking of a crypto wallet where you store cryptocurrency and any NFTs you own.
One of the reasons that NFT scams can succeed is because they are such a new thing and people’s knowledge is limited. We want you to go into any NFT transaction armed with knowledge and the ability to recognize a scam when you see one.
Now that you understand what NFT fraud is and why you could be at risk if you plan to buy or sell NFTs, let’s review 6 types of NFT scams plus some advice to help you recognize and avoid them.
The first type of NFT scam you’ll need to avoid is the NFT phishing scam. In case you need a reminder, phishing is a scam that has been around for a long time. It involves sending someone to a spoofed website that looks like a legitimate website and collecting private data such as your login information and password.
NFT phishing scams may come in the form of emails, SMS messages (texts) or even social media ads. A common scam is to provide a link to a site that looks like a reputable NFT marketplace. Once a scammer has your information, they can use it to steal your NFTs or cryptocurrency.
There’s an easy way to avoid NFT phishing. Never click on a link provided to you by somebody else. Instead, go to Google and search for the site. Then, compare the URL of the link to what you found on Google.
You should also bear in mind that in many phishing scams, the perpetrators make common spelling and grammar mistakes or fail to follow the usual protocols of the site they’re spoofing. For example, a legitimate NFT marketplace might personalize emails they send with the user’s name. A phishing scam is unlikely to do that and will more likely start with a generic salutation.
A rug pull scam happens when a group of scammers uses social media to hype an NFT or group of NFTs to drive up the prices. As more people invest in their project and the prices rise, they suddenly stop promoting it and instead, abscond with their investors’ money.
Another way of looking at a rug pull scam is that it's the NFT version of a Ponzi scheme. A Ponzi scheme involves selling investors on an investment that doesn’t really exist and then taking their money before they realize they’ve been scammed.
The best way to avoid a rug pull scam or Ponzi scheme is to research the developers hyping the project to see if they are legitimate. You can verify them by doing the following things.
If you do decide to buy an NFT that’s been hyped, you can protect yourself by using a burner wallet with a limited amount of funding to minimize your losses in the event something goes wrong.
A pump and dump scheme has a lot in common with a rug pull scam with a few key differences. In a pump and dump, a group of scammers buys NFTs to drive up the demand. These are usually NFTs that they already own, but they buy them back under phony accounts. When the value is high enough, somebody else will buy the NFT and the creator leaves the market.
This type of scam can happen with traditional stocks, too, and it illustrates why it’s so essential to research anything before you buy it.
The best way to avoid a pump and dump scheme is to check the history of any of the crypto wallets involved in the transactions. Legitimate NFT marketplaces pride themselves on transparency. You can use EtherScan to view every transaction on the Ethereum blockchain – something that’s useful since most NFTs are minted there.
You can also check a community’s popularity on sites such as Twitter and Discord. Any legitimate buyers and sellers will have a real following, while phony accounts are likely to have few followers.
Social media giveaways are always popular, but be wary if you see a giveaway promising to provide you with a free NFT. The typical contest rules for a scam say that you’ll get a free NFT if you spread the word about the contest and sign up on the (phony) marketplace’s website.
Once you sign up, the scammers will have access to your crypto wallet and any currency or NFTs you have stored there. They’ll collect your login information and steal everything, leaving you high and dry.
The best way to avoid a giveaway or airdrop scam involves two simple steps. The first is to check the marketplace’s profile page and make sure it’s legitimate. The second is to compare the URL of the offer to the real URL of the marketplace. Some giveaways may be legitimate but many are not, so don’t skip these steps.
Since NFTs are often minted to represent artwork, it should come as no surprise that plagiarism and counterfeiting are both issues in the world of NFTs. It’s common for NFT scammers to find artwork online on sites such as DeviantArt and ArtStation, copy or download it and turn it into an NFT, which they then sell.
The issue for consumers is that they could spend money on something that the seller had no right to sell and leaving them in trouble when the artist discovers the theft. It would be akin to paying for what you thought was an original painting only to find out it was a fake.
You can avoid having your artwork stolen by using a tool called DeviantArt Protect, which scans blockchains and alerts artists when their art has been stolen. As a consumer, you should always research the NFT itself and the seller. You should look for online reviews and complaints and stay away from buying from anybody who seems shady.
Finally, if you ever plan to sell an NFT, either an original that you created or something you purchased and want to resell, you should be aware of bidding scams. When you list an NFT for sale, you will list your preferred cryptocurrency as part of the price.
With a bidding scam, bidders may change your preferred cryptocurrency without telling you. Since there’s a big difference in value between cryptocurrencies, a switch can make a huge difference in your profits.
You can avoid bidding scams by carefully reviewing any bid before you accept it. Pay attention to the cryptocurrency being offered and if you’re not sure about it, research it until you are sure. You should never settle for a bid that’s less than what you feel the NFT is worth.
With the rising popularity of cryptocurrency and NFTs, there’s no shortage of NFT scams. Whether you’re a buyer or a seller, it’s crucial to pay attention, understand the most common scams and learn how to avoid them. If you don’t, you could lose your NFTs and any money you spent to create or acquire them.
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