GET IT ALL – Why it’s very risky to invest in NFTs

Still mysterious for many French people, NFTs are a new bet for many Internet users. But the risk of losing everything is significant.

These are three letters that question, make you dream, or irritate. NFTs (“non-fungible token”, or “non-fungible tokens” in French) have been talking about them for several months. Despite a concept that remains very vague for the greatest number, they have already attracted 3.5% of French people. But turning to NFTs is often turning to a high-risk bet. Explanations.

• What is an NFT?

On paper, the definition of an NFT is elementary: it is no more and no less than a certificate of digital property. Namely a document that certifies that an individual is the owner of a physical or virtual object.

The term “non-fungible token” refers to the fact that unlike a cryptocurrency, such as bitcoin, an NFT is unique. If a bitcoin is worth any other bitcoin, an NFT can always be identified, and certify the ownership of a unique object.

“NFTs can represent different, digital objects, or, for example, show tickets, which have the characteristic of being unique,” ​​summarizes Willem van den Brandeler, executive of the specialized company Chainalysis, with BFMTV.

• What is not an NFT?

“There is a lot of confusion around what an NFT is,” admits Willem van den Brandeler, however. By confusion, the NFT is sometimes equated with the object to which it is attached – for example a work of art. By analogy, this error would be tantamount to confusing a sales receipt with the product for which it traces the purchase.

The NFT is also not a certificate of intellectual property on a work of art. As with the sale of a classic painting, the buyer does not benefit from the reproduction rights on the work itself. In the same way as the buyer of a disc does not obtain the royalties on the pieces of music which it contains.

Furthermore, an NFT is in no way an exclusive right to a digital work of art. If it is available online, for example in JPG format on an auction site or on social networks, the image associated with an NFT can be saved and used by anyone, free of charge.

• What is an NFT used for?

Without exclusivity on the work of art associated with it, owning an NFT simply amounts to being recognized as the sole owner of this work, without however benefiting from any advantage over other Internet users, who are also free from it. save it, use it as wallpaper on their smartphone, or even print it out to display it at home.

Unlike a painting, no “original” version exists in the real world, which the owner could benefit from.

In this context, an NFT has no intrinsic function and is a purely speculative asset. For the buyer, the goal is then to resell it later at a higher price to make a profit.

• Is an NFT necessarily speculative?

“Most people fully understand that this is speculation. But in the medium and long term, NFTs will tend towards uses and not just towards artistic speculation” anticipates Owen Simonin, including the YouTube channel popularization of the subject of cryptocurrencies now exceeds 500,000 subscribers.

While NFTs are often associated with works of art, these certificates of ownership can be attached to any object. For example, the Coachella music festival recently put tickets on sale offering “lifetime” access in the form of NFTs. As with any show ticket, the buyer can choose to take advantage of it or, possibly, resell it if its price were to rise.

• Why do so many people want to invest in NFTs?

“The starting point of this craze is in March 2021, with the sale of an NFT from Beeple for $69 million. There were then less than 10,000 people who had NFTs, then there was a phenomenon of transition of people who entered cryptocurrencies for two years and who were unaware of this phenomenon” recalls Jean-Michel Pailhon, executive of the company. Ledger, specialized in the storage of cryptocurrencies, and itself an NFT collector.

“It’s an attractive market that is growing very quickly. In 2020, we had 106 million dollars in transfers, in 2021, we went to more than 44 billion” recalls Willem van den Brandeler.

In addition to the purely speculative aspect, the NFT craze was carried by certain stars such as footballer Neymar or singer Justin Bieber. By offering NFTs attached to monkey drawings – immediately driving up their prices, they inspired many of their fans.

“NFTs are both an object of belonging to a community and it is worth something to some. There is a status side, like someone who would play on his status by having a Rolex. On social networks, hundreds of people will know that you have an NFT” summarizes Jean-Michel Pailhon.

• What are the main risks of NFTs?

When it comes to buying a work of art, the main risk is the loss of value of this same work. Yet it is this use that seems to make some Internet users dream of making a fortune. But lack of knowledge of this area, which now seems accessible to all, can lead to major risks.

“As in the traditional world, very few works will really have value. When it’s no longer fashionable, it can quickly go the other way” tempers Owen Simonin to BFMTV.

But the specialist mentions another major risk: the fall in the price or interest in Ethereum, the cryptocurrency used for the exchange of NFTs and in which buyers are therefore forced to invest to access this market. “In this case, interest in NFTs may collapse,” he argues.

Alongside these market developments, one of the main risks for investors is linked to the massive presence of scams, set up by crooks wishing to take advantage of the craze around NFTs.

• How to recognize an NFT scam?

Among the main NFT-related scams, experts cite “wash trading”. A scam that involves creating an NFT and then creating multiple accounts to buy the digital asset from yourself at increasingly higher prices. The goal is then to simulate market interest by creating a fake surge in the price of the NFT.

To detect these manipulations, a good knowledge of technical tools is essential, starting with that of the blockchain, the technology behind cryptocurrencies and NFTs. It is a digital ledger open to all, which displays the history of all transactions made around a digital asset.

“We can, for example, compare transactions linked to an NFT with other transactions of the same type. Knowing that fees apply to each exchange, it can be interesting to see if the evolution of the price is based on a low number of transactions. A sign that may suggest that it is a scam” specifies Owen Simonin.

“There is also the risk that the community that promotes these NFTs on social networks or Discord are actually bots, to give the impression of a craze” adds Willem van den Brandeler. For the potential buyer, spending time studying enthusiasts of an NFT collection is therefore paramount.

The other main risk concerns the profusion of NFTs based on works of which the seller is not the real author. On paper, nothing prevents a dishonest Internet user from saving a photo or video found on the Internet to resell it as NFT.

On the Opensea trading platform, the most popular on the NFT market, 80% of property certificates are thus linked to fraudulent works. For the buyer, it therefore remains essential to find out about the legitimacy of the seller’s account, and about the history of the work he wishes to acquire.

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GET IT ALL – Why it’s very risky to invest in NFTs

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