NFT and Scammers — What You Need to Know
13.08.2024
There has been significant media coverage about the impressive profits gained by early investors in cryptocurrency, including non-fungible tokens (NFTs) and blockchain technology. As a result, the potential for quick and easy money has created a frenzy in the market, attracting scammers and unethical investment promoters. Several creators and marketplaces have been accused of fraud and NFT schemes.
One of the earliest and most intriguing NFT projects was CryptoPunks, launched in 2017. CryptoPunks were created by two Canadian software developers as 10,000 unique characters, each represented as an individual NFT. All were generated through computer code. While CryptoPunks are now far from their peak prices, their floor price once reached 70.1 ETH.
Recent NFT Scams
The "pump and dump" scheme has gained popularity in the NFT space. This scam begins when fraudsters acquire investments and then artificially "pump" the price of those investments by spreading fake news. These false claims are often disseminated through social media platforms like X, Discord, Telegram, and others. At this point, the scammers "dump" their investments, selling them for a profit.
Another common fraudulent act in the NFT industry is the "rug pull." NFT project creators collect funds from clients, often causing investors to lose their entire investment. Rug pulls occur when creators encourage consumers to purchase NFTs. Once the creators achieve sufficient sales, they abandon the project without warning (reneging on any prior promises made to NFT investors). Ultimately, creators cease project support, sell off remaining NFTs, and let asset prices plummet to zero. This type of scam is prevalent in the NFT industry because project creators often remain anonymous. For instance, many influencers and creators in the NFT space are known only by their X handles or the name of the NFT they own. This anonymity often enables project creators to evade legal consequences.
Phishing attacks have also become one of the most dangerous types of scams in the NFT space. Social media platforms have become primary resources for the NFT community, offering news and updates, but also providing a useful tool for scammers. Malicious actors often advertise fake NFT giveaways. The ultimate goal is to trick individuals into connecting their crypto wallets to unknown websites, which then steal all funds from the victims' wallets. Hackers using this method often create counterfeit websites of popular NFT projects, sell fake NFTs, or impersonate well-known creators.
Airdrops are another tactic scammers use to commit fraud in the NFT industry. Typically, airdrops are free distributions of new crypto assets. Many NFT projects offer community members airdrops as rewards for holding specific NFTs. These may inсlude new NFTs or utility tokens tied to particular NFTs. Scammers send consumers new crypto assets or NFTs embedded with malicious code in the smart contract, effectively hacking the victim's computer or crypto wallet. People concerned about activity requirements or interactions with smart contracts can create new wallets to mitigate the risk of loss.
While NFTs are a relatively recent innovation, the scams surrounding them are far from new. The U.S. Securities and Exchange Commission (SEC) was established in 1934 partly to protect investors from such fraudulent practices. However, the rapid growth of NFTs has left the SEC playing catch-up.
Red Flags in NFT Investments
- Unrealistic Investment Returns: No investment is risk-free. Dishonest promoters often advertise guaranteed profits or claim NFTs are comparable to other historical investments that were extremely lucrative.
- Quickly Created Promotional Materials: Scammers often rush to prepare marketing materials before launching a new fraud. They may also lack technical knowledge about the software or processes. This often results in advertisements with minimal or no technical information about how the token works. Additionally, the company's website may be empty or nonexistent.
- Credit Card/Bank Account Payments: NFT purchases typically involve cryptocurrencies and require linking a crypto wallet. If a project requests credit card or bank account details, it is a serious red flag.
- Fake or Nonexistent Team Members: While many NFT project creators remain anonymous, it is still essential to research the team behind a project. Anonymous NFT creators often have social media presences. It's important to ensure the creator is active and engages with the project and community members. An NFT team that rarely updates its community might indicate a scam.
- Celebrity Endorsements: Influencer endorsements can be fake, and genuine celebrities may be unaware their name or image is being used to promote NFTs. Even legitimate endorsements should not be the sole basis for investment decisions. Many celebrities lack financial expertise. There are numerous examples of stars being deceived by unscrupulous friends, promoters, and business managers.
- Limited-Time Offers or Discounts: While many legitimate NFTs offer discounted prices for early investors, this is also a tactic used by dishonest promoters. As a result, traders may rush to invest without fully considering the financial risks.