5 Lessons Investors Should Learn From NFT Fraud Cases

For those not in the know, NFTs are non-interchangeable units of data stored on a blockchain to certify ownership of a particular digital asset. These assets could be just about anything, from Jack Dorsey's first-ever tweet to whimsical postcards depicting marijuana-smoking simians.

The Common World of NFT Scams

NFTs are big business. In 2021 alone, more than $22 billion was spent on those nifty jpegs, and the market looks set for even greater prosperity in the coming years. 

However, in the same year, crypto and NFT investors lost nearly $14 billion worth of digital assets to crypto scammers. 

Crypto scams come in various guises. They could come in the form of rug pulls, where purported developers promise to deliver NFTs to prospective clients but later make off with the funds collected for the project without fulfilling their promises.

Scams could also come in the form of phishing emails purportedly announcing new NFT airdrops.

They could also come in the form of "wash trading," better known as pump and dump, where a series of trades are used to artificially inflate the value of an NFT and make it seem like the increase in value is the result of organic interest.

Chainalysis reports that at least 110 NFT transactions in the last year were wash trading cases. The said transactions generated a combined $9 million in profits. However, the number of cases is a very conservative estimate. Chainalysis believes that many more cases of wash trading remain undiscovered.

The NFT space has also suffered from insider trading cases, the most recent being the Opensea incident, where a senior employee used privileged information to purchase NFTs on the platform.

The industry is also riddled with fake NFT pieces purported to come from world-renowned artists. Just recently, a collector nearly lost $300,000 worth of Ethereum (ETH) after buying a fake Banksy NFT. Luckily for the collector, his funds were returned to him by the scammer, who jokingly called himself Pranksy.

As the NFT space becomes more valuable, there will be an inevitable rise in fraud cases. In this short write-up, we shall look at what lessons potential investors can learn from previous incidents of fraud to keep them safe while buying and selling NFTs.

Do Due Diligence

In NFT scams, the devil is always in the details. It is incumbent upon you to do due diligence. You should search for the names of the members of the project's team and check their profiles on social media or LinkedIn. Anonymous teams or teams composed of people with irrelevant qualifications should promptly raise a red flag. 

You should also look at the time it takes for an NFT project to become publicly available. Projects that come out within a short time and with limited engagement on social media are much more likely to be scams. 

Legitimate creators take their time to perfect their products, and they also tend to build strong online communities with which they constantly engage.

Remember, the trick is to look at engagement, not followers. Scammers can quickly buy bots to follow them, but it is more difficult to fake interest in a project.

Finally, as an NFT investor, you should check roadmaps and white papers when considering which project to invest in. You should decide whether the promises made in such documents are truly achievable or not.

Only Share Your NFT Details With Websites You Trust

As we said before, phishing scams are a growing scourge in the world of NFTs. Investors new to the space can be very easily suckered, especially with so many new NFT airdrops coming thick and fast.

The fear of missing out (FOMO) on a lucrative NFT usually causes investors to fall prey to phishing scams. A recent Privacy HQ survey indicates that no less than 16% of NFT users have fallen victim to phishing scams at one time or another. These types of scammers are usually interested in your wallet and security details. 

So what can NFT investors do to protect themselves? Never give out your information, especially your 12-word security phrase. Ideally, the security phrase should not even be online, and you should store it offline in a USB drive or a private notebook behind a lock and key.

You should only submit your details on sites you visit and which you trust, rather than those linked via email. But remember, before you buy an NFT, make doubly sure that you are on the right website and not a doppelganger. A lot of fake NFT marketplaces look pretty similar to the real ones. Take your time and explore various online marketplaces; write down their addresses, and when you finally want to buy that NFT that has caught your eye, check the domain of the store you are on to see if it matches the legitimate platform.

Do A Google Image Search of the NFT

Nowadays, scammers download and copy artwork from Deviant Art and Art Station websites and then sell them on marketplaces like OpenSea as original NFTs. Therefore, to protect yourself from buying fake NFTs, you can run a simple image search on Google to confirm their authenticity. 

Additionally, you should, at the very least, check the seller's account for a verification badge, check the seller's social media activity to see if it matches their work, and check the seller's marketplace history to confirm whether they are genuine dealers or not. 

Do not be afraid to vet sellers. Documented evidence of NFT scams proves that it is relatively easy to make fake profiles, even on legit NFT marketplaces. Therefore, do a deep dive, and find as much information about the seller before forking over your hard-earned cash to buy an NFT.

Use 2FA Authentication

Several Nifty Gateway users lost collectible tokens valued between $10,000 and $150,000 to a hacker early last year. In a statement released after the attack, Nifty Gateway said that none of the hacked accounts had activated two-factor authentication (2FA) and had been accessed using valid account credentials.

2FA is an extra security layer that requires someone accessing an online account to provide two pieces of evidence to prove their identity. It usually comprises a password and a unique code that can only be used once.

Fraudsters have proven that they can steal user details held in the repositories of NFT marketplaces. While it is true that anything online is vulnerable, it certainly helps to have 2FA turned on for critical online accounts. More often than not, 2FA will prevent hackers from accessing your account even if they compromise your password.

Author’s Take

NFT platforms have taken some measures to mitigate the risks associated with trading digital assets. Still, investors should learn from other fraudulent acts and apply them whenever buying or investing in NFTs. 

There is no foolproof method to avoid getting scammed, but always do copious amounts of research, keep your security keys offline, and remember to use 2FA to protect your accounts.