NFT (non-fungible tokens) are a tokenized version of assets on blockchain technology. When assets are digitalized on blockchain, they are given a unique identity. This identity can be tied to digital goods like artworks, video games, music, memes, real estate, etc.
While some love the future-edged digital concept NFTs bring to the table, others are too skeptical about the underlying implications of this virtual market.
Although NFTs have been in full swing for the past two years, we can’t ignore the risks that tag along. Read on to learn more about the dangers associated with these non-fungible tokens before investing!
1. Cyber Risks
As popularity increases, so do the risks. We can’t deny that as much as NFTs are valuable, they come with their own set of problems. One of the major ones is cyber threats.
Cyber risks have skyrocketed in the crypto world. In some cases, entire NFT stores have been replicated and set up online. They often pose to be real by copying the original store logo, content, and branding. Unsuspecting buyers fall into this trap and end up buying an NFT that doesn’t even exist in real or online world!
Cyber threats also exist in the form of impersonation. Several fraudsters impersonate famous NFT artists and sell their work.
2. Legal Issues
Globally, NFTs do not exist in the legal dictionaries of any country. There are no international recognitions or organizations that can implement regulations. But since the use cases of NFTs have increased, producing a regulatory body for this industry is becoming a necessity.
An indeed volatile market, the NFT industry keeps noticing price changes every now and then. You can buy it at $100 with the illusion that the price will rise. But as the industry is unpredictable, you may even see a dip in the price.
Alternative to this scenario, buyers, can also end up making money with their investment. But all this loss and profit is only uncertainty. No one can be sure of when the market will dip or rise. So, it is safe to say that the market works on probability.
4. Smart Contract Risk
The DeFi network comes with its own set of challenges. In certain scenarios, hackers can easily attack your DeFi network and steal your crypto. This happens due to weak points in the smart contracts.
If there are flaws in the code of your DeFi network, hackers can easily break in, creating an entry point and stealing your crypto on a large scale.
5. Evaluation Challenge
NFT price determination is still a dangly subject to be touched upon. Uncertainty revolves around the market, and there are no standards that determine a confirmed NFT price. The price for each non-fungible token is mainly decided based on its scarcity, creativity, and uniqueness. Hence, fluctuation of prices happens.
Moreover, other element that plays a huge role in the price fluctuations of NFTs is the indecisiveness people face while pinning down factors to derive an NFT’s price range. A firm evaluation of these tokens is still a problem in the market.
Another factor that makes NFTs a risky matter of investment is their cost. They fall on the expensive weight scale since they are collectible items that can never be duplicated. They’re meant to be rare and costly. And when the rarity aspect comes into play, prices soar high.
However, if the price is a matter of concern, you can try to invest in fractions. Since rarity makes NFTs precious, they’re more difficult to grab. But with fractionalized NFTs, the ownership of the token is split between multiple people. This simple act of dividing the cost makes it possible for people to own a high-value NFT at a low cost!
7. Federally Unregulated
Depending on country to country, laws change regarding NFTs. Several countries follow different policies for these non-fungible tokens. The government of the USA wants to accept evolving technology by recognizing NFTs as a service or a commodity. Since the government legally recognizes these tokens, they pose lots of rules, prohibitions, and regulations on them.
Moreover, they are falling prey to anti-money laundering laws according to the Bank Secrecy Act (BSA) of 1970. In February 2022, the United States Treasury Department’s Financial Crimes Enforcement Network (FinCEN) published a study on “Facilitation of Money Laundering and Terror Finance Through the Trade in Works of Art,” which reported art trade to fall on the radar of high-risk money laundering rackets. While there’s no explicit mention of NFTs, digital art is found as suitable prey for money laundering scams.
Since blockchain transactions allow tracing wallets without KYC, anonymous transfer value is possible. For this reason, the US Financial Crimes Enforcement Network (FinCEN) mentions the digital art market as a hub for financial crimes.
Should You Invest in NFTs?
The value of NFTs depends on the use cases. One of the best ways to invest in it is by owning a game collectible or an artwork. Apart from this, whether to invest in NFTs is your choice. Depending on the market, the current scenario, and calculating all the risks, think and research before investing a chunk of dollars!