How to avoid NFT scams
Experts weigh in on how to purchase legitimate NFTs and avoid the flurry of fraud
NFTs – non-fungible tokens – took over the limelight in 2021, becoming part of our everyday vocabulary, as more people than ever put money into it. The unique wallets that had ever bought an NFT grew from 190,000 to two million in the space of a year, according to Non-Fungible.
But like most financial industries, the NFT market has its fair share of scam artists. Malicious players are especially rife in the crypto industry, as it is not heavily regulated or at all. There are number of tactics fraudsters use. So, in a minefield of fraud, what are NFT scams, how do NFT scams work and what should you be looking out for?
Buy from trusted sites
When looking to buy an NFT, there is a lot of trading websites and marketplaces to choose from, which is not necessarily a good thing. A quick Google search for NFT sites will show you thousands of options, especially as many crypto projects are releasing their own NFT marketplace, including play-to-earn games and cryptocurrencies.
Telling the difference between a trustworthy marketplace and a scam site that has no legitimate NFTs can be challenging. But there are small but notable differences that you can look out for.
A good rule of thumb when looking at how to avoid NFT scams is to never share your private wallet seed code, the 12 words needed to access your wallet. If there is a website, pop-up, or email asking for it, get out quickly. Usually, you should only have to provide the address of your wallet. Giving away the master seed key can lead to your wallet being drained of its funds.
Professor Ronghui Gu, co-founder of CertiK, the blockchain security ranking organisation, warns of scammers turning to social media to get access to your wallet. He said: “Never divulge your private key or seed phrase to so-called support agents who message you over Discord or Telegram.”
Even if you are buying from a trusted site such as OpenSea, users can still be victims to scams. Just like Instagram, Twitter and other social media sites, OpenSea verifies its users with a blue tick. Another way to decipher legitimate projects is by checking its descriptions: some NFT scams fail to include details about the project.
Adam Morris, co-founder of NFT Club, said: “It's important to always be vigilant, if you are buying a collection, make sure it is verified. Lots of people make copy collections and try to confuse people into buying the wrong asset. Consider whether the price of the NFT seems legitimate and check if the contact address of the NFT aligns with that from its creator’s website."
Rug pull NFT scams
Those familiar with crypto lingo may have heard of rug pulls. It is a malicious move from crypto developers who hype up their project subsequently driving up the price, only to then abandon it and leave with investors’ money. The Squid Game scam last year was a rug pull, it saw the founders walk away with millions while investors lost thousands. It even cost a Shanghai investor his life savings.
These scams are not just isolated to cryptocurrencies. There have been rug pull NFT scams as well. The Evolved Apes rug pull was especially devastating: it saw the project developer walk away with 798 ETH, or roughly $2.7m at the time. The developer shut down the website and social media channels, leaving investors without the promised fighting game that would accompany the NFTs.
For those wondering how to avoid NFT scams founded by fraudsters, it is best to approach every new NFT project with caution. Research the developers and founding team before putting any money into a project. It is especially wise to be wary of anonymous developers, as nothing is stopping them from walking away with your money.
Pump and dump
Another term used in the crypto community is pump and dump. This refers to a group of investors who purchase NFTs and manipulate them to a high price. When they are sufficiently happy with the price tag, the scammers sell off the worthless asset and walk away with a substantial profit.
These schemes can be spotted by looking at the transactions on the NFT marketplace or EtherScan, a site that shows you every Ethereum transaction. Especially focus on the same asset being sold between the same wallets.
Another way to avoid these NFT scams is to look at the number of wallets holding an NFT or NFT collection. The more wallets, the less likely the price will be controlled by a small group. For those who value the rarity of an NFT, ensure a substantial number of investors are engaged in the project and there is an active community.
NFTs have created a rift in the art world. While some promote it as a viable source of income, others are wary of its exploitative nature. Several artists have reported their work being stolen and sold on NFT marketplaces, including OpenSea.
Scammers can easily impersonate artists by using a profile picture and bio, convincing fans it is an official account. RJ Palmer, an artist who creates realistic video game art, tweeted in December 2021 that his art had been turned into NFTs 29 times in just 24 hours. In the Twitter thread, he described feeling “powerless and hopeless”.
Josh Sandhu, co-founder of the NFT advisory service Quantus Gallery, raises the point that this is nothing new to the art scene. Art forgery has existed for centuries with scammers and artists stealing from each other. He said: “It's unfortunate that these things happen, but until there's more ways to verify an artist and their collections, I expect this to continue, as has always been the case in the traditional scene.”
The easiest way to tell if an NFT was generated by the original artist is to look for that blue tick. As mentioned above, OpenSea verifies the artist’s identity, providing users with a way to decipher legitimate artists from impersonators.
For those purchasing on a marketplace without a verification system, take a look at the artist’s social media. It is likely they will promote their latest NFT drop. Or in the case of RJ Palmer, artists may warn their following that their work has been stolen and turned into NFTs.
These scams may vary in their tactics, but they are all centred around deception. An investor’s key defence against malicious attackers is research. Before putting any money into an NFT, research the marketplace, wallet addresses and the artist’s information.
Dr. Lydia Kostopoulos from KnowBe4 said:“NFT scams are growing day by day.” The common NFT scams pivot around using classic deception methods such as fake websites. But she argues that these scams will become increasingly advanced: “We are at the dawn of the NFT marketplace. Just as the marketplace evolves, so will the scams."
Every legitimate NFT will have an address, a long string of characters, that will show the user the previous transactions and who currently owns it. Investors can check on EtherScan or OpenSea for this address.
It could be. The nature of NFTs means every token is different, so the value and price changes will depend on the token. The other charm of NFTs is personal value, investing in something that could bring you joy, whether that’s a Crypto Punk or Beeple artwork. Remember, you should always do your own research before investing.
It depends. Some NFTs have rocketed in value, such as a Crypto Punk that was bought for $673 and sold for $4.7m. But there are NFTs that have lost their value as well, so you should never invest more than you can afford to lose.