It’ll be practically difficult to read through your news or social media feeds in 2022 without coming across a heated debate about NFTs, cryptocurrencies, and other blockchain-based technology.
Digital assets are being investigated and invested in by a variety of players. NFTs are being embraced by a variety of industries, including big tech, music, and gaming. Despite a drop in digital asset values, cryptocurrency companies raised a record $25 billion in 2021 and are still going strong in 2022. Some high-profile athletes and elected figures have requested that their salaries be paid in cryptocurrency.
The popularity of NFTs and cryptocurrencies is being fueled by a lot of enthusiasm (and a lot of FOMO). However, this is a complicated place that is being developed and understood in real time, and there is still a lack of monitoring to protect users in this new frontier from risks. I authored articles last spring about the key questions purchasers and sellers should consider before investing in NFTs. As the ecosystem develops, new questions emerge.
I’m not anti-technology or anti-Chicken Little, but I feel we should proceed with caution in this case. Ignorance is not a viable option. It’s up to you to protect your own interests until additional structure, advice, and information become available.
Take into account the dangers
Understand the security, privacy, and financial dangers before investing in NFTs or cryptocurrencies:
- It’s a relatively new technological advancement.
Although Bitcoin was created over a decade ago, blockchain technologies are still relatively young and have evolved rapidly in recent years. Furthermore, as new blockchain-based digital assets such as NFTs and crypto tokens are issued, the field is now populated by more than just cryptocurrencies.
- It’s an illiquid and uncontrolled market.
These digital assets are unregulated and not guaranteed by the Federal Deposit Insurance Corporation (FDIC). You could pay a premium price for an NFT only to find out later that it is a fake asset or worth much less than you paid. You’re putting your money into a system that encourages you to “be your own bank,” which means you’re on your own when it comes to account security.
Beyond banks, there are companies, such as my own, that can provide fiat currency protection services. In the future, we’re looking into adding crypto and NFT monitoring to trading platforms. However, finding a third party with the knowledge and technology to confidently monitor and secure your digital investments in this fast changing industry is unlikely at the moment.
- There is a lot of NFT crime.
In NFT marketplaces, theft, fraud, and wash trading occur at alarming rates, and it’s difficult to see how these issues will be remedied within existing systems. Scammers can readily create an NFT from a digital file, regardless of whether they have the legal authority to do so. Because over 80% of assets “were plagiarized works, fake collections, and spam,” OpenSea, the most popular NFT marketplace, limited the amount of times users may mint NFTs for free earlier this year. Due to outcry from NFT developers, OpenSea withdrew the new regulation a day later.
- There are two types of exchanges, each with its own set of security concerns.
You can purchase cryptocurrencies on a centralized (CEX) or decentralized (DEX) exchange, and neither is immune to hacking and security issues. A third party conducts transactions in a CEX, and assets must meet specified criteria, adding another layer of protection. There are no intermediaries to manage transactions or assets in a DEX, hence security risks are significantly increased. You have little recourse if you forget your password or get scammed on a DEX.
Before you jump, have a look around.
After you’ve learned about the dangers of investing in NFTs and cryptocurrencies, you should take the following steps:
- Examine your motives.
Consider what motivates you to consider making this type of investment. Do you have a fear of missing out? Are you inspired by success tales you’ve heard from friends or seen in the news? What level of risk are you willing to take? If you’re hesitant, go with your instinct and ask others you trust and respect for their opinion.
- Only put your money on the line if you’re willing to lose it.
Treat the cryptocurrency market as if it were a game of chance rather than an investment. Remember that these exchanges are young and unpredictable, and you could lose all of your money if you use them. If you have some spare cash and want to try your hand at crypto, only spend as much as you’d be willing to lose at the Vegas craps tables.
- Ensure that security is a top priority.
Before you register an account or execute a transaction, do your homework on the NFT and crypto markets. Is it a centralized or decentralized exchange? Is there any protection for users against identity theft or frauds on the platform? Does it need the use of strong passwords as well as two-factor authentication?
To increase the security of your accounts, utilize a password manager across all platforms. A good password manager will automatically generate a strong password with the maximum number of characters and change it on a regular basis. All you have to do is set a single master password that you can remember, and the vault will store all of your other passwords.
It’s tempting to get carried away with the latest technology, but everything that involves your hard-earned money should be carefully considered. Take the time to properly investigate platforms, assets, and currencies. Examine your reasons and goals. If you do decide to participate, make sure your accounts are as secure as possible.