We all know that sometimes, the NFT space is a bit of a digital gold rush. Every other day, someone’s flashing their Bored Ape, bragging about overnight riches, and urging you to "ape in" before you miss the rocket. And who's fueling this frenzy? Influencers. Influencers are not inherently evil. Their completely unfiltered FOMO when it comes to NFTs can spell disaster if you’re not cautious. They’ll take you inside the Lambo, but they won’t show you the mechanic’s bill.
You see the price go up! You believe it’s the ideal time to purchase. It's a trap.
Liquidity Mirage
So you think you can come in and easily tomb raider that NFT and make a nice profit. Think again. The NFT market is not very liquid even by stock exchange standards. These influencers will brag about increasing floor prices. The easy part to ignore here is the terrific difficulty in selling after the buzz wears off.
Here's the harsh reality: many NFTs, especially those hyped up by fleeting trends, become illiquid assets. You might have a digital picture worth thousands on parchment. Finding a buyer willing to pay half of that amount is a serious problem. It’s the equivalent of having the rarest stamp collection in the world, but its value only gets unlocked when someone is willing to pay for it.
- Data Point: A recent report by Chainalysis found that a significant percentage of NFTs are held by a small number of wallets, indicating a lack of broad market participation and potential liquidity issues.
Before buying any NFT, check its trading volume and the number of unique holders. A low trading volume indicates it will probably be hard to sell down the road. Don't just look at the price. Look at the activity.
Smart Contract Backdoors
Smart contracts are meant to be the foundation of trust in the NFT space. What should we do when that bedrock has deep fissures? The dangers of smart contract vulnerabilities are not hypothetical, and they have already caused catastrophic harm.
Now, I’m not talking about trivial bugs. I don’t mean the deliberate backdoors that allow creators to drain funds or otherwise manipulate the NFT. It’s just about like purchasing a new house only to find out the builder set up a hidden door for own use.
- Unexpected Connection: Think of it like the 2008 financial crisis. Complex financial instruments were hailed as innovative, but hidden risks and vulnerabilities ultimately led to a collapse. NFTs, with their smart contracts, are similarly complex and prone to exploitation.
Invest only in projects with audited smart contracts from reputable firms. Find crypto projects that have bug bounty programs. These efforts help incentivize white-hat hackers to responsibly discover and report vulnerabilities before bad actors can exploit them.
Regulatory Wild West
The legal landscape revolving around NFTs has yet to be clearly defined. This has generated a regulatory black hole that bad actors can use to operate and where investors can be left exposed.
Now picture this scenario—in which the SEC has decided to apply the full weight of securities law enforcement on the unregistered securities masquerading as NFTs. What are the potential implications if your NFT project is considered illegal in your jurisdiction? Your investment could vanish overnight.
- Example: The SEC has already started scrutinizing NFT projects that offer fractional ownership or promise future profits, hinting at a potential crackdown.
Be aware of the legal and regulatory risks in your jurisdiction. As always, if you’re in doubt about the legality of an NFT project, consult with an intellectual property or securities attorney. Know your NFT market, diversify your portfolio, and avoid putting all of your potentially illegal eggs in one basket.
Environmental Cost Ignored
Other NFT projects have already begun moving toward better alternatives. The environmental impact of some NFTs, particularly those on the Ethereum blockchain, continues to be a key concern. This is something you’ll seldom hear discussed by influencers, as it doesn’t truly align with the sexy “get rich quick” narrative.
Support NFT projects that use energy-efficient blockchains like Solana or Cardano. Seek out initiatives that neutralize their carbon impact by purchasing third-party verified carbon credits.
- Left-Leaning Concern: If you care about climate change, you should be aware that some NFTs contribute to carbon emissions.
The NFT market is ripe for manipulation. So a handful of whales can quickly jack up the floor price of a given NFT collection. They produce perverse demand, attracting dupes and charlatans alike. Social media influencers, frequently flown out and paid to shill for these projects, become complicit in this process.
Market Manipulation Games
Be wary of NFT projects with suspiciously high trading volumes or sudden price spikes. Assess the project’s ownership structure and search for evidence indicating centralized control. Don't fall for pump-and-dump schemes.
- Data Point: Research shows that wash trading (buying and selling NFTs to oneself to inflate trading volume) is rampant in the NFT market.
Or influencers seem to have access to secret shower curtain rings insider information that they fail to disclose to their followers. From this, they might receive exclusive early access to future NFT drops. They may be benefitting from reduced prices or even being paid to promote doomed projects.
Asymmetric Information Battle
This information asymmetry creates an overwhelming disadvantage to regular investors. You’re playing a rigged game and one that’s stacked against you from those who hold all the trump cards.
Be skeptical of any NFT promotion, especially those that seem too good to be true. Make sure you conduct your own research and do not take or make decisions just based on influencer’s recommendations. Ask yourself: What's in it for them?
- Example: Imagine an influencer knowing a project's team is about to abandon it, but continuing to promote it to their followers.
The endless speculation and short termism of the NFT space is very addictive. FOMO, or the fear of missing out on the next big thing, can drive impulsive decisions and financial devastation.
Psychological Addiction Trap
NFT trading is capable of triggering that same dopamine flood in your brain as gambling. This forms a feedback loop that is all too quick to reward and entrench addictive behavior. The high low of the day The price volatility and the allure of making a fast fortune is heady stuff.
Set strict limits on your NFT investments and stick to them. Only invest what you can afford to lose. Take time away from the NFT space and continue to work on other things in your life. If you realize you do have a gambling issue, get the help you need.
- Unexpected Connection: The psychological manipulation tactics used in the NFT market are similar to those used by casinos and social media companies.
NFTs might still be a legitimate form of investment and venture, but they can provide fun and thrilling opportunities. It is important to use them more cautiously, above all with awareness, common sense and a good deal of skepticism. Don't let FOMO cloud your judgment. Just don’t forget that the influencers promoting their latest “success” stories never let you in on everything that goes wrong behind the scenes. Ultimately, it’s up to you to research and safeguard yourself from the dangers lurching in the unacknowledged shadows.
NFTs can be a legitimate investment, and they do offer exciting possibilities. But it's crucial to approach them with caution, awareness, and a healthy dose of skepticism. Don't let FOMO cloud your judgment. Remember, the influencers showing off their "success" stories rarely show you the full picture. It's on you to do your homework and protect yourself from the hidden risks.
