If you’re considering making money on NFTs, you should have a full understanding of how to tread steadily in the rough “crypto waters.” It could potentially save you time, effort, and money!
NFTs have exploded as high-tech innovations in the crypto space and are adapting to various art mediums. In 2022, the majority of the NFT market exists on the Ethereum blockchain network.
But before diving into the NFT world, you need to be wary of certain things and consider all the precautions to ensure your success. Here are 5 common pitfalls to be wary of before your jump into NFTs.
1. Not paying attention to what kind of storage type your NFT has
The key concept supporting NFTs is ownership; or the guarantee that the purchased goods are exclusively yours and nobody else’s. These guarantees exist due to the storage type of digital collectibles: uploading them in decentralized blockchain technology. Decentralization entails that no external authority can control or alter NFTs.
Unfortunately, many NFT projects use centralized ‘off-chain’ storage methods. This leads to appropriation issues: if an NFT is stored on a centralized server, the person or organization that runs the server can modify it at any time. Would you accept a project team modifying your NFT whenever they want?
It’s like getting an expensive tattoo that meets all your expectations. Then one day you wake up and see the artist adding a whole new part to it. If you own the artwork, it shouldn’t be modifiable unless you agree to it.
NFTs are not just about artistic qualities, as they can take many different forms: a tweet, a red pixel, a plot of land, a meme, etc. With that in mind, it is important to evaluate the technology behind NFTs, because while artistic qualities are subjective, technology isn’t.
2. Buying NFTs that are just a fad
Imagine spending one million dollars on an NFT and waking up one day to find that it has no value! Instead of your precious digital collectible, the only thing left is a ‘page not found’ message. While this may sound like the plot of a black mirror episode, it is unfortunately a very realistic scenario.
The issue relates once again to off-chain storage and decentralized servers. When stored on a centralized server, NFT’s ‘life expectancy’ depends on the organization that runs the server. If the organization goes under or the NFT project does an ‘exit scam’ the NFT will become a broken link.
The only NFTs that are not at risk of facing these longevity issues are the ones that have their assets (the media and metadata) stored on the blockchain or InterPlanetary File System (IPFS). IPFS is an alternative open source technology to HTTP focused on speed and security.
3. Purchasing NFTs that may not be authentic
Similar to a lot of valuable products (paintings, antiques), there are counterfeit NFTs going around on the market. One way to verify if an NFT is ‘real’ or not, is to check if its smart contract has been verified on Etherscan — the blockchain explorer.
Some project teams don’t take the extra step of verifying the smart contracts of their digital collectibles. As such, they leave buyers at the mercy of scammers, as they could easily end up buying counterfeits.
4. Not factoring in the transaction fee costs into the NFT trading process
When you exchange crypto, buy an NFT, you’re often charged a transaction fee. The same goes for traditional e-commerce sites like eBay and Depop, but these fees vary depending on the platform.
For example, OpenSea charges sellers a 2.5% transaction fee, in which 2.5% of the sale value will go to OpenSea. However, buyers don’t need to pay any transaction fee. This is the case for the majority of NFT marketplaces, including Known Origin and Axie.
However, some platforms charge a fee on both ends of the transaction, such as Rarible, which charges the buyer a 2.5% fee on top of the NFT price per transaction. So make sure you’re aware of any existing fees on your chosen platform before making any purchases.
5. Spending the whole money on crypto
It’s tempting to put your entire investment budget into something as scarce as crypto and NFTs during a bull market. Although gains are swift and intense, keep in mind that this industry is new and quite volatile.
We usually hear about the individual who converted $1,000 into $100,000. But we seldom hear about the hundreds of others who lost a lot of money investing their last dollar.
Don’t invest your groceries and money immediately. Until you want to live on low. Wait for the market to come around. Only put the money you can afford to lose.
But we got your back! Here are some tips for avoiding those problems:
Now that we pointed out all the things that could go wrong with an NFT, we can take a look at how to reveal if a particular NFT may be facing some costly issues. As mentioned, there are a few things to consider:
- Keep track of the overall decentralization of the assets
- Check the specific storage methods used
- Go ahead with the verification of the smart contract
- Repeat after us: transaction fees, transaction fees, transaction fees!
- Don’t be greedy
You can verify these manually or use some free tools. If you don’t have the patience or time to check all these manually, try to find a suitable browser extension that will do the job for you.
If you want to buy a digital collectible that is not at risk of falling apart or being modified, you should always inspect its provenance and where it’s stored.
The nascent world of NFTs is full of possibilities, the whole community is working towards making it as safe as possible. But in the meantime, if you are part of this exciting journey, you should keep a compass to avoid getting lost and making costly mistakes…