Are NFTs a scam? Top things to know before investing in NFTs


NFTs are everywhere, from mobile games, collectible NBA cards, to lands, wands, and all sorts inventory fluff you can collect and trade in different crypto games. Unfortunately, NFT scams are also everywhere.

With such wide usage, and with the all-to-common get rich quick stories floating around, we want to inform our readers on the true nature of NFTs and answer the frequently asked questions – are NFTs a scam or something which is a smart investment?

NFTs are not scams, and buying an NFT can be a lucrative business idea, but it takes a lot of research, planning and some luck to actually earn money from NFTs. NFT scams exist, they are fairly common in the crypto world, but bad investment is even more common.

In this article, we will answer what are NFTs, how to buy NFTs, how to avoid NFT scams, and how scammed buyers could have avoided a few of the recent NFT scams.

What is an NFT?

NFT is an acronym that stands for non-fungible token. They are a special type of object on the Ethereum blockchain that is unique and can’t be replaced, or reduced to smaller parts.

A Bitcoin can be divided into smaller parts – Satoshis – but NFTs cannot. Each NFT is a unique object and there is exactly 1 of that particular NFT.

Unlike typical crypto coins, NFTs store additional information, such as their source, mint number, etc. A good analogy are Magic: The Gathering or Pokémon cards – each of those cards is enumerated and unique, and some of them have immense value.

For example, the Black Lotus card is the most expensive Magic: The Gathering card of all time, with prices ranging anywhere from $100,000 to $250,000.

Similarly, some NFTs are worth tens and hundreds of thousands of dollars, while some are worthless.

It is important to remember that NFTs are unique, they live on the blockchain, and often, but not always, have monetary value attached to them.

How NFTs gain value?

NFTs are created via a process called minting. When NFT creators mint them, they create unique copies of a NFT. Almost always, the amount of copies that will be minted is limited.

Sometimes, the author decides that there will be 100 copies of his digital art. Each of these 100 copies is a unique NFT that was minted, and that’s it. There’s no more, and there is no less.

As all other collectible items, NFTs gain value through the market’s desire to own them. NFTs don’t have an inherent value – they’re just bits and bytes on the blockchain – but buyers and sellers determine the value based on demand, hype levels, and other non material properties.

NFTs can’t gain value and become valuable from thin air, someone has to be willing to buy them in order for them to be worth anything.

If you’re a gamer, you may be aware that some games sell in-game skins in limited amounts, and for special events. Similar to skins, NFTs rely on the market’s demand to gain value.

Therefor, most NFTs exist in vacuum until the market decides that they are hot and trading starts, bringing the price up.

Are NFTs then… a scam?

No, NFTs are not a scam, but you should be aware that most of them do not have any inherent value or utility behind them. Some do, especially in crypto games, but most NFTs are simple collectible items that cannot earn you passive income if they are not traded.

Are expensive watches a scam? Is the art market a scam? Wikipedia tells us that

The art market operates in an economic model that considers more than supply and demand: it is a hybrid type of prediction market where art is bought and sold for values based not only on a work’s perceived cultural value, but on both its past monetary value as well as its predicted future value.

And the NFT market operates in the same way. When buying a NFT (or multiple NFTs), you must be aware that its price can go up and down. This doesn’t make NFTs a scam, but they are a volatile market that is not well understood and often abused.

Of course, there are NFT scams out there, and some NFTs being sold are not unique at all, and this is something we want our readers to be aware of.

How to recognise a NFT scam?

NFT scams fall into a few different categories, but most of them have some common denominators to look for.

Rug pull scams are the most popular type of NFT scam. In Rug Pull scams the scammers promote their NFTs as something super valuable and unique and ask for buyers to pledge their money ahead of the mint (or during the minting process).

As buyer accumulate wealth into the scam platform, the scammers decide to make an exit and they withdraw the money without ever releasing the NFTs. In some cases, you may actually get the NFTs you paid for, but they are now worthless.

There a million different examples of this process, but here’s how it often looks like:

Scammers promote selling in-game virtual land plots / items / characters. Buyers spend money on virtual items, hoping to get a good price on something that will be worth more in the game’s future economy. The development team suddenly “disbands”, or has a “security breach”, and the game’s future is at risk. Months go by with little to no communication from the devs, and in the end the whole game is cancelled. The developers blame the “security breach” for loosing their customers’ money.

Fake NFTs are another popular type of NFT scams, since they are incredibly easy to pull off. The gist is simple – the authors simply sell digital images, without actually minting NFTs. These projects often come with a lofty social media campaign, promises of incredible value, and very little background on the authors of the NFT artworks.

As money comes in, the scammers wait for their exit. The buyers actually receive something, usually it’s a JPEG attached to an email, and the scammers run off with their money and e-mail addresses. As NFT verification is not simple for non-technical buyers, this scam can be devastating to large audiences.

Security breaches and “security breaches”

In one of the biggest NFT security breaches ever, buyers of the Bored Apes Yacht Club NFTs have lost just north of $3 million to a recent security breach.

On April 25, 2022, their Instagram account started posting links to a fraudulent website where users could mint their own Ape NFTs in an “airdrop”. After raising $2.7 million the creator / hacker / scammer disappeared leaving the NFT owners with nothing.

The BAYC author is now claiming that their Instagram account was hacked and the loss is the result of this hack. It is still not clear if this was intentional or not, but it does send ripples throughout the NFT community, and should be a clear warning for anyone entering the world of NFTs.

How to safely buy NFTs?

Illuvium Land Sale
Illuvium Land Sale

Buying safe NFTs usually comes down to spending time to do the research on the NFT authors, the project where they will be used, and to gain a good understanding of their future value and potential.

We wrote recently about the upcoming Illuvium Land Sale, and we think this is a safe NFT to invest in, for a variety of different reasons:

  • First of all, their crypto coin $ILV is listed on Binance, which means a third party has already done the research and concluded it is safe for trading
  • The development team is stable, reliable, and they have been working on the core Illuvium game for a while now
  • The Land NFTs they are selling have a clear purpose and utility in the Illuvium ecosystem, and they are necessary for the core game to be playable
  • The sale takes place on a somewhat verifiable platform, although it’s a platform developed internally, and not externally. We’re not keen on that, but it is what it is
  • The company has announced partnerships with other verified crypto startups and they have invested capital in the project

All of these factors make it a safe bet when it comes to buying their NFTs, be it in-game lands or something else.

However, this doesn’t guarantee you will earn money from owning these NFTS. Like we already mentioned above, NFT prices are driven by the market, and not by anything else.

Illuvium’s Land NFTs, just like any other NFTs, depend on the market to have any actual value. If the market decides that the game is bad, and the game flops, the NFTs will lose value on an instant.

Similarly, if the game is a success, and Illuvium’s NFTs are hot stuff, you could be in a position to earn good money from owning them, or from selling them.

Should you invest in NFTs?

The following is not financial advice. Always do your own research.

With all of the above being said, we must say that investing in NFTs is a very, very risky decision. As of the time of writing this blog post, there are very little actual usages for NFTs, and it is not clear where the entire market is headed.

Aside from the questionable future and use of NFTs, there is a more practical aspect on the whole topic – fictitious trading and wash trading.

NFTs can be sold on different NFT markets, and you don’t know who the buyers and sellers are, or more importantly, if they are the same person with multiple accounts. Consider the following:

  • Bob, the artist, creates an NFT and sells it for $500 to Alice
  • Alice sells the NFT to Mallory for $2000 on the same day
  • You, the observer, look at the NFT’s trading history and see that the price has quadrupled from Bob to Mallory, meaning that this is a popular NFT that is going to gain value, right?
  • However, you have no way of knowing if Alice, Bob and Mallory are all the same person who is doing fictitious trades to inflate the NFT’s value

In essence, when buying and selling NFTs you don’t have a lot of securities that protect you from scams, price hikes, pump and dumps, etc. You are essentially gambling that someone else will want to buy the NFT for a higher price than you bought it for.

In all fairness, most NFTs don’t even recoup their minting costs, and most people lose money on NFTs, or simply never sell them.

If you consider cryptocurrencies to be investment-worthy, then NFTs should be considered gambling at best, and mostly scams at worst.

Parting words

NFTs are a controversial topic, and we hope this article helped you understand what they are, and more importantly, what are NFT scams and how they look like. We’ll leave you with a video that describes NFTs one more time.