Why is fraud getting more common in the NFTs market?

NFTs market

The market for NFTs reached $40 billion. But is it a total scam? On the one hand, it attracted key figures across tech, sports and show business. But on the other hand, there’s multi-million dollar fraud happening every week. Some see it as a revolutionary technology, others as mere speculation. What’s the truth? Where is this stuff actually heading?

A big market is brewing here. Celebrities are paying fortunes to get in on the hype. This has helped breed an industry of thousands of freelancers who make a living building NFTs. The problem for both is that this market is built on a shaky foundation. Prices and interests can drop overnight and it can be very hard to tell what’s real or purely market manipulation. Is it possible to trust this market? Why is fraud getting more common? And what’s the real value of NFTs? I mean, how are some pictures worth $200, while some are worth $300,000.

Until two years ago, if you told someone you’re an artist, they’d probably ask you, okay, and what do you do for a living? Well, things kind of change. Take Mike Winkelmann. He’s a South Carolina-based artist that goes by the name of Beeple. On March 11, 2021, he changed the game for the whole NFT community. How? He sold an NFT collage through an auction house for $69 million. I think it probably means the digital artist is here to stay.

Christie’s, the London auction house that conducted the sale, claimed that this positions Beeple among the top three most valuable living artists. So what’s behind all of this? When buying NFTs, we need to consider two elements, exclusivity, and social status. These elements are also essential when it comes to scams.

Now, broadly speaking, an NFT is a non-fungible token, a unique digital certificate that’s registered on the blockchain. Basically, NFTs exist to prove a digital item is your property. It can be as simple as the ownership of a JPEG or represent a physical, real-world item. Now, exclusivity. Many NFTs have a sort of country club business model. Few available places, strong hype, and high demand.

Exclusivity exists because the various NFT collections have a limited number of pieces available to buy. They are few in number and price like plutonium. This creates a high barrier to entry. In fact, the average price for NFTs is out of reach for most people. According to Bloomberg, the daily average price went from $128 in 2021 to nearly $6,900 in January 2022.

All of this makes it a status symbol for the owner. In no time, the wealthiest people got involved. I mean, what do Jimmy Falon, Serena Williams, and Eminem have in common? Besides the obvious, I mean. They all own a slice of the most costly collection in the world, Bored Apes. Bored Apes is a series of 10,000 cartoonish monkeys generated by an algorithm like this.

Bored Apes Nfts

The price? Eminem got his Khaki and Gold version for $450,000. Right or wrong, the same logic applies to owning a Rolex or showing off a logo on a T-shirt. Nowadays you get that status with NFTs, and the bet is figuring out which collection will last for the long term.

Before getting into scams and market manipulations, let’s see how fair is the NFT market? How is wealth distributed?

The Web 3 world is inspired by the DeFi decentralized model. This is revolutionary because this model is all about taking power away from governments and the usual centralized business structures. This is true from an investment perspective, but also from a decision-making perspective. However, some aspects have more in common with good old-fashioned businesses than we may think.

For example, according to the Financial Times, the NFT market in 2021 was concentrated in the hands of a few big players. According to a report by Chain analysis, only These few big whales are equal to just 32,000 wallets, and they sit on hundreds of millions. Of course, this happens with every market, but it’s something worth noticing.

And while early investors managed to get fat margins, according to the Financial Times, most new NFT collectors are still far from even recovering the costs of their purchase. And this doesn’t even bring up the issue of safeguards. There’s a guy who typed in the wrong number and sold a Bored Ape for a 99% discount. The system obviously works for some but isn’t perfect.

How much money can you make with NFT?

Well, I recently came across a story of Jose He’s, the owner of a child care facility who saw his earnings drop to zero during the pandemic. What did he do? Well, he was interested in design, so he decided to go freelance and draw NFT collections. He gathered a few collaborators, and in a few months, he was able to make over $260,000. And he’s not the only story like this, because the NFT industry is supported by an army, a literal army of freelancers, thousands of them all around the world, who are sustained by coding, designing, and building.

But what happens if there’s a bubble and it pops, or if the market goes down because of fraud?

Well, in short, it’s bad, I decided to check the numbers and according to the freelance platform Fiverr, two thirds, two-thirds of their freelancers in the US work for the NFT industry. These are probably hundreds of thousands of people. Not only that, the number of users offering services related to NFTs increased by over 270% while profits grew. Everybody’s jumping on board to join the party while the money’s there. So is it possible to get rich by selling them and living the rest of your days on a boat in the Mediterranean? According to some economists, not really. Not everybody.

In fact, a report showed that many NFTs don’t sell at all, and those that do sell make barely enough to cover the costs. So again, the real bucks are made in the higher-end collections and the ones that started long ago. And this depends on the market, a market that is extremely uncertain. Some say the bubble will burst soon. Others say that this is just the beginning. My answer is neither, and I’ll explain that in just a moment because first, Crime & NFTs.

Clearly, not all NFTs are scams. But there have been a few major scandals lately. For example, OpenSea, which is the largest NFT marketplace, recently said on Twitter that 80% of their artwork, the artwork made with their free minting tool is fake. When you’re buying NFTs, there are three main types of criminal activities to be aware of.

First, Wash trading. Wash trading is a practice where you basically buy and sell the same item to yourself over and over, just to pump up the price. This makes your NFT look hot and in demand. The idea is eventually someone will notice the buzz and buy from you. Of course, it’s as valuable as your toaster, but only you know that.

This happens in the real art world as well. But it’s more difficult there. Why? Because if you want to sell your fake sculpture for a lot of cash, you’d have to go to an auction house like Sotheby’s, and they would charge you 25% of each transaction through crypto. The costs are lower, so it’s easier to pull the scam.

To give you an idea of the numbers, a study found that a group of 110 Wash traders managed to clear nearly $9 million. And there’s more. One morning, an artist from Texas woke up and typed her name into Open Sea. She found 87,000 NFTs of her artwork for sale. And the problem is that she didn’t list any of them. They were all stolen, so the second common activity is plagiarism.

Similarly, a known Dutch artist found that more than 100 of her works are being sold as NFTs without her knowledge. The way to fight against this is by sending individual Copyright infringement notices. But that’s time-consuming and new listings can pop up faster than Will Smith after a Jada joke. In response, OpenSea said that this is just a small percentage of their transactions and that more than half of their staff is working on issues of plagiarism and content moderation.

But there’s a third and even more severe problem, Rug Pulls. A couple of months ago, a new collection of NFTs called Frosties was put on sale. They depicted several funny-looking ice cream characters, and it raised interest.

 Frosties

Various buyers put in around $1.3 million. All seemed well until things started to disappear. Frosties’ Twitter, their discord, their website, and even crypto wallets, are all gone. They took the money and they completely vanished. That’s called pulling the rug from under your feet.

Back to our original point, what’s the value of NFTs?

I think the value is enormous, but let’s put an asterisk on that because we’re at a very early phase and there are many misconceptions. NFTs are not about digital art or images that are sold for a lot of money. It’s a new technology that changes the way we think about digital property. It establishes who owns what, but also gives you the right to do certain things if you possess a specific NFT. And by doing this, creates a community behind certain projects.

NFTs of the music company Royal have a specific utility. If you own the NFT, you become a co-owner of the royalties of their songs. So the key with NFTs is their utility, the benefits, and opportunities that they bring with them. We’re unlikely to see much more popular NFTs that are simply JPEGs just a picture that you could screenshot. And this is why we’re now seeing most NFT projects proposing their own games or metaverses or third party benefits, or take Flyfish, the dining club where your NFT gives you access to their restaurant.

This way, NFTs create a new business model that is centered around the community and exclusivity. If before we were just spectators, now we can participate in the projects that we like. Let’s make an example. Imagine that in your city, a brand new cinema opens up, with the best recliner seats and the best popcorn ever. Imagine that you could buy a subscription to that cinema through a limited NFT.

Well, if the cinema gets popular and everybody goes there, then the value of the NFT, which represents your subscription, will increase as well. It makes you a part of that project and allows you to monetize your participation if you ever want to sell it, even though it’s not a share of corporate ownership. And the same could go for a subscription to a concert venue, or a gym, or maybe your mom starts selling them to join in on Thanksgiving dinner because no one appreciates her cooking.

This new community-based economy allows entrepreneurs and creators to gather people around their projects and interact with them. Tarantino launched a Pulp Fiction NFT where the owner gets to talk to him and learn some secret insights about the film. He got sued for it, but that’s another story. With NFTs, the sky is the limit when it comes to potential applications.

Take the Metaverse. NFTs will play an essential role because they represent digital ownership of all the assets which could be goods, clothes, or digital real estate. It will allow you to buy and trade these assets. And of course, it’s a revolution for the gaming industry. For years, people have poured time and money into video games obtaining objects that first, they couldn’t resell and second, they couldn’t bring into any other game. They had no value outside of that small ecosystem.

Now with NFTs, the property of these digital items is certified so you could potentially transfer your sword or skin to another game or even sell it. But where this technology could make the greatest impact is in the real world. The blockchain is great because it’s public traceable and immutable.

Imagine if your car title, your driver’s license, or Social Security card was stored on the blockchain. This technology is already here and a whole lot better than the literal pieces of paper that we use today.

But if this is so great, why do we see so many scams? I think it’s the nature of how this all started. It just so happened that the first widespread application of NFTs was in the arts so it generated a lot of hype and prices went to the moon and back the reality is the majority of NFT art projects won’t be around in five years and either way frauds and market manipulations are not intrinsic to NFTs.

It’s just that the first wave was about collectability and speculation. So we have this ruthless combination of a lot of money floating around in a brand new technology and honestly, it’s a great stress test. The value exchange means there’s an incentive for problems to be fixed. Now there are open questions like how and when the sector will be regulated and how this use will evolve throughout the years. But what’s for certain in all of this is that NFTs are here to stay.

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