NFT Risks: 10 Red Flags for Potential Investors

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Investing in non-fungible tokens (NFTs) can offer great earning potential, but also involves risks. Before investing in NFTs, it is important to understand the risks associated with them. This guide covers common forms of risk associated with NFTs and how to protect yourself from them.

A lot of crypto trading was going on, but we don’t know from where this NFTs oil dripped. If it ruins its reputation, it will take away the respect of the entire crypto industry.

If you are thinking that NFTs are new in the market, then you are wrong. If you go back a few years, you will find a game called Crypto Kitty, whose purpose was to play to earn, which worked just like the present NFTs game. The only difference is that it was not as infamous as NFTs are now.

Well, these are all old things. But we cannot even suppress these things because people ask how such a good thing got spoiled or why should not invest in NFTs. I just told you two, but there are many such questions that will make any pro-crypto person shut their mouth.

Today we will talk about why suddenly NFTs have become in this condition and why people are hesitating to invest money in them. By the way, investing money in NFTs also has its own advantages, but today we will see why shouldn’t we invest money in NFTs.

What Are the Risks of Investing in NFTs?

Price Manipulation.

This is a very easy and the best way to scam anyone. In this, the creator or the scammer creates two or more accounts. He uploads NFTs from one account and buys his own NFTs from another account. Trickster does this many times, so it seems that the demand for that NFTs are increasing, due to which its price is also increasing, but nothing like this happens. This process is called wash trading in technical language.

Wash trading is when the buyer and seller in a transaction are the same people or two people colluding. It’s banned in conventional financial markets because it misleads the rest of the market about the true level of demand, distorts prices, and entices others to trade on fake information. Read more.

Research says wash trading has only one objective: to exploit the NFT marketplace as much as possible because there is zero risk in it. Wash trading is more common on those NFT marketplaces where there is a reward system, like Looksrare, followed by those where NFTs can be sold at higher prices, like Opensea. The interesting thing is that only 2 to 3 accounts are involved in more than 70% wash trading.

Example of price manipulation (source: Magic Eden)

Depend on popularity.

This is a huge factor in determining the price of any NFT. If I ask you to name anyone with NFTs, the fancy-looking monkey or the pixel-headed boy that we call BYCM and crypto punk will immediately come to mind. Under the guise of this popularity, they are being sold indiscriminately, but when the popularity ends and they do not sell, then people start saying bad things about NFTs.

NFTs trend.

Highly Volatile.

If you are buying and selling NFTs but not cryptocurrency because you find it very risky,. On a 1–10 scale, how much do you think it is risky? The more you consider crypto as risky, the more NFTs are probably even riskier because you can sell crypto immediately, but you cannot sell NFTs immediately.

You have to understand that NFTs and Crypto have a direct relationship with each other, if the crypto price goes down, then NFTs will also go because all the activity of NFTs is done by crypto (mostly ETH, BNB, or SOL). But it gets worse when the demand for NFTs also falls. So if you can’t handle this highly volatile market, then you should not invest in NFTs.

Risk of Ownership.

Like cryptocurrency, you cannot store your NFTs in a non-custodial wallet or cold wallet, which is a big problem. A platform is required to buy and sell any NFTs but what will happen when that platform is closed? For example, Opensea which is an NFT -leading platform, if it runs away or stops working for some time. Will we be able to access it because it’s on Opensea computer? Although this problem can be solved if NFTs come on a decentralized platform.

AI-Generated NFT Art.

You must have heard the name chatGPT which is artificial intelligence that is capable of doing almost all the work. Just like this AI or say AI’s illusion is on the internet and equally there are a lot of NFTs in the market. Just think, if you buy one of your NFTs and later come to know that it is AI-created and not human-created, then maybe someone would think of bidding on that NFT.

The problem here is not that it is AI-created art, the problem is that of copyright. As you know, AI does not create an original image, but it creates a new image by taking together the images available on the internet and there may be some part of that AI image that infringes someone’s copyright. Surely someone would not want to invest in such NFTs.

The issue with Government.

So far the government has not been able to regulate crypto, even though it is facing difficulty in adopting blockchain, leaving aside things like NFTs. I am not saying that the government will not regulate NFTs, but as of now, nothing like this is visible.

At present, NFTs is being included in the countries which are bringing regulations on crypto, but they are not giving full clarification on whether NFTs is a digital asset or a commodity. People say that the government is refraining from speaking on this because they do not yet know how to regulate NFTs so that it does not violate rules like on copyright or trademarks.

Limited Market Liquidity.

The market for NFTs is still relatively small and the liquidity of individual tokens within it can be limited. This means that if you need to quickly sell an NFT, it could take longer than expected as there may not be a lot of buyers or sellers at any one time. It’s also important to understand that new investors in the space are entering with the expectation of high returns but often lack the technical understanding necessary for successful NFT investments.

Not fast tradable as crypto.

If you have money, then obviously it doesn’t matter to you how fast or not tradable NFTs are because all you have to do is show off on your social media profile. But it is a big problem for those who just want money. In crypto trading, one just has to place an order, and the amount gets filled automatically, but in NFTs, the buyer and seller have to agree on a fixed price, which takes a long time. This risky trend of NFTs becomes a favorable condition for any investor not to invest money.

NFTs Fraud.

Fake, copyright, and airdrop NFTs come into this category. In this case, a scammer tries to sell NFTs by posing as someone else or a famous person. These NFTs are made so well that one cannot understand the difference between real and fake. Overall, intellectual property rights or copyrights are violated in this, due to which the government is also having trouble in regulating it

Original and fake NFTs (source: -thehive.ai)

Not Environment Friendly.

Poor Bitcoin is always criticized on the pretext of the environment, and the same thing is being done with NFTs. But there is no accurate calculation of how much energy NFTs consume. It is said that it takes so much energy to transfer one Ethereum coin, which produces about 130 kg of CO2, while on this same energy, a house can run comfortably for two to three weeks. However, this is an ethical problem, not a risk of NFTs, and keeping in mind this problem, the ETH network has shifted from proof of work to proof of stake.


Closing – Risk of Investing in NFTs.

There are some technical and some non-technical risks in this NFT risk, which means it can be avoided by taking some precautions. Of all these, I find price manipulation and fraud to be the riskiest. Just like every aspect has two parts, one bad and one good, in the same way, NFTs also have two sides; just that good aspect has to be kept in front of the world. By the way, what do you think? Do you consider NFTs risky or a good way to invest money?

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