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

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

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

• What is an NFT?

On paper, the definition of an NFT is elementary: it is neither more nor less than a certificate of digital ownership. Namely, a document that certifies that a person 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 another 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,” sums up Willem van den Brandeler, director of the specialized company Chainalysis, with BFMTV.

• What is not an NFT?

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

NFT is also not a certificate of intellectual property in a work of art. As with the sale of a classic painting, the buyer does not enjoy the reproduction rights on the work itself. In the same way that the buyer of a disc does not obtain royalties on the pieces of music 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 attached to an NFT can be saved and used by anyone, for free.

• What is an NFT used for?

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

Unlike a painting, there is no “original” version in the real world that the owner could take advantage of.

In this context, an NFT has no inherent 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 applications and not just artistic speculation, “predicts Owen Simonin, whose YouTube channel for popularizing the topic 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 up tickets for sale that offer “lifetime access” in the form of NFTs. As with any exhibition ticket, the buyer can choose to take advantage of it or possibly resell it if the price increases.

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

“The starting point for this craze is in March 2021, with the sale of an NFT from Beeple for $ 69 million. At that time, there were less than 10,000 people who had NFTs, so there was a phenomenon of people switching to cryptocurrencies. for two years and who was not aware of this phenomenon “, remembers Jean-Michel Pailhon, director of the company. Ledger, specializing in cryptocurrency storage, and even an NFT collector.

“It is an attractive market that is growing very fast. In 2020 we had 106 million dollars in transfers, in 2021 we went to more than 44 billion “, remembers 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 linked to monkey drawings – instantly driving up prices, they inspired many of their fans.

“NFTs are both an object of belonging to a community, and it’s worth something to some. There’s a status page that someone would play on their status by having a Rolex. On social networks, hundreds of people will know, that you have an NFT, ”sums up Jean-Michel Pailhon.

• What are the main risks of NFTs?

When it comes to buying a work of art, the biggest risk is the loss of the value of the same work. Still, it is this usage that seems to make some internet users dream of making a fortune. However, lack of knowledge about 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 is no longer fashionable, it can quickly go the other way, ”temps Owen Simonin to BFMTV.

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

Alongside this market development, one of the biggest risks for investors is associated with the massive presence of scams created by crooks who want to take advantage of the craze around NFTs.

• How to recognize an NFT scam?

Among the major NFT-related scams, experts mention “laundry trade”. A scam that involves setting up an NFT and then creating multiple accounts to buy the digital asset from yourself at ever higher prices. The goal is then to simulate market interest by creating a false increase in the price of NFT.

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

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

“There’s also the risk that the community promoting 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, therefore, it is crucial to spend time studying enthusiasts of an NFT collection.

The second major risk relates to the abundance of NFTs based on works of which the seller is not the actual 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 stock exchange platform, the most popular on the NFT market, 80% of the property certificates are thus linked to fraudulent works. For the buyer, it is therefore still important to find out the legitimacy of the seller’s account, and about the history of the work he wants to acquire.

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