What are NFT buying risks?

Given that a significant number of people buying NFTs are motivated simply by speculation the biggest risk associated is the potential loss in value. 

Risks from loss in value of NFTs

There can be no better illustration of this risk than the sale of the first tweet by Jack Dorsey bought by Malaysia-based businessman, Sina Estavi, for $2.9million in March 2021.

The tweet, simply saying “Setting up my twittr” was sent in 2006, and sold by Dorsey for charity.

The tweet clearly has cultural significance, but it 
seems it was massively overvalued by Estavi. 
When he relisted the NFT for sale just over a 
year later, the highest bid was $6,200 which 
represents a decline of 99% in value.

The best way to mitigate the risks of paying over the odds is to understand what gives collectable items, such as NFTs, value. Valuing an NFT isn’t a slide-rule process you need to consider scarcity, provenance, utility and demand. 

Though the blockchain allows you to see the sale history of an NFT, previous purchases aren’t always a reliable guide to demand and should be treated with caution. 

The relative anonymity of the blockchain allows unscrupulous sellers to try and inflate the price of an NFT by effectively buying it from themself. Fake provenance can also include NFTs being transferred to influencers, without them even realising, to increase the perceived value of a collection.

In addition to understanding how value can be manipulated, it is important to understand the mechanics of the NFT buying process as that can present significant risks.

Risks from the process of buying & selling NFTs

If you are going to buy an NFT for the first time you should use a reputable marketplace. Scammers will try and convince you to buy or sell NFTs directly, often through Discord, Telegram, Twitter or messaging directly within blockchain-based applications. 

Scammers will use any tactic to pressure you into buying directly but this is likely to end badly. Though buying from a marketplace is safer you still need to understand the process such as the costs of minting, listing for sale, cancelling listings and buying an NFT. Every action must be confirmed on the blockchain and so has an associated charge which will vary depending on the chain used by the marketplace.

In 2021 OpenSea had to change its policy around listing cancellation. Reluctant to pay the charges for cancelling a listing, users were leaving their NFTs available for purchase at a huge discount to the current price, allowing opportunists to snap up bargains.

It is also important to check on marketplaces that the contract address associated with an NFT has been submitted for public inspection on Etherscan or other blockchain browsers. You should see a green tick next to the contract address.

The fact that a contract has been submitted doesn’t mean its contents can be trusted, but it is a minimum requirement for due diligence when buying an NFT.