A New World of Assets — The Top Challenges and Risks of NFTs

NFTs are the new craze in digital trading, with both celebrities and everyday collectors forming a healthy online community in which digital assets form the products of a thriving market. With gifs, music, videos, and even tweets making people rich overnight, NFTs are now the new crypto and blockchain technology craze. They are being used in a variety of scenarios, and in many different ways.

While now may seem like a good time to hop onto the NFT bandwagon, it is important to know some important NFT challenges and risks that are associated with the ownership, legal definition and actual relative value that NFTs hold in the short-term and long-term.

A Slippery Slope — Challenges and Risks of NFTs:

Smart Contracts:

Recent hacks and the theft of millions of dollars worth of NFTs all point to inadequacies in the security levels of smart contracts associated with NFTs. Since these contracts are records of the NFT’s ownership, transaction history and original creator, this poses a serious risk when considering high-value NFTs.

The flip side of this issue is that increased security protocols on smart contracts may limit compatibility between NFTs on different blockchain platforms and wallets. Due to varying formats between decentralized databases, it can also distort their transaction history. This could cause fluctuations in the values of NFTs that are already volatile to begin with.

NFT Fraud:

NFTs can be prone to fraud in terms of fake ownership, fake NFTs, or fake creators who are attempting to impersonate somebody famous. Fake ownership of NFTs is a distinct possibility, as fraudsters can create fake marketplaces that are replicas of the original marketplace, and push fake NFTs to collectors even as the original digital asset is safely owned by somebody else!

It is possible for fake artists or celebrities to mint NFTs that are intrinsically inauthentic. That said, impersonators can still generate a lot of hype and demand which inflates its price. It is important to remain aware of such fakes and to be on the lookout for any tell-tale signs of spoofing, impersonation or fraud when looking to add an NFT to your collection.

Challenges in Evaluation of Price and Value:

The price of an NFT is highly volatile as it is dependent on several factors. The original creator, their influence in their field, scarcity of the NFT, any exclusive benefits, and a host of other variables — are constantly influencing the value of the NFT. Thus, making it very hard for collectors to estimate their value at the time of purchase or in the long-term from an investment perspective.

Furthermore, NFTs are also challenging in ascertaining their ownership of the original creator and a collector or as an individual entity who has purchased the “rights” to it. It can be challenging to carve a corner into existing Intellectual Property Rights (IPR) laws that can comprehensively cover the ownership of NFTs and the division of any monetary benefits that they may accrue.

Another problem with NFTs is that their value may appreciate or depreciate unpredictably. The gaming front is a great example of this ambiguity, considering the unique use case that NFTs have brought about for video games.

Unique items, such as rare weapons, armor, or characters, are now tradable commodities whose ownership uniquely belongs to the owner instead of the publisher of the game. However, the value of such NFTs can drop drastically if the publisher decides to stop supporting an existing game, leaving collectors with ownership of items that require time and effort to mint or acquire in-game but are now without their unique value.

Regulatory and Legal Challenges:

On the legal front, NFTs are prone to confusing red tape and international regulatory variations between countries and regions. It is due to differing approaches from governments worldwide to the recognition of NFTs as digital assets that qualify for trade under existing financial systems and agencies.

Few tradable commodities are not subject to extensive scrutiny due to the internet’s anonymity. NFTs can be challenging for administrations to comply with Anti-Money Laundering regulations, which is another risk of NFTs due to their susceptibility to criminal manipulations.

NFTs as Securities:

Official recognition of NFTs as securities is another key area of concern for collectors today and is among the most critical risks associated with them as a trading option. According to the Chairman of the SEC, NFTs are currently being sold as securities in most marketplaces. However, they are only considered investment contracts as per the Supreme Court. They must comply with various requirements of the Howey Test to even qualify as securities, needing a lot of checks and verifications to be safe and secure.

Can You Secure Your NFT Collection?

While the various challenges and risks that come with ownership of NFTs may be daunting for a prospective or existing collector, the good news is that there are a host of innovative solutions designed to address these issues holistically.

The UnleashNFT platform from bitsCrunch, for example, is capable of using its proprietary AI tools such as Price Estimation, Forgery Detection, Washtrade Detection. This gives you, a collector, complete peace of mind and control over your NFT collection and ensures that you are buying the right NFTs from the right sellers.

While the world of NFTs and blockchain technology may seem new and intimidating to a potential collector, it can also be very profitable and rewarding if they are thoughtful about their purchases and sales. It can be pretty easy to build a collection with the right tools to help drive those decisions. It is not only rewarding financially but can also provide various exclusive benefits and add value to a collection as well.

About bitsCrunch

bitsCrunch, The Most Comprehensive Data-Driven NFT Insights Ever, offers buyers and sellers potential tools like Price Estimation, Forgery Detection, Washtrade Detection, to identify digital wash trading, asset forgery, the true value of assets, and respectively.

Yes, bitsCrunch’s securing services can be integrated in any of the NFT marketplaces with a sense of protecting the authenticity and provenance of the artists and the NFT assets. Also, bitsCrunch keeps you posted on all the latest NFT trends and updates on Unleash NFTs — Launching Soon.

Are you interested in knowing more about the tools or NFT market cap? Get in touch right away.

Our Products:

Unleash NFTs, A real-time NFT analytics dashboard and portfolio tracker.

Washtrade Detection, An AI agent that acts as a watchdog to flag spoofing transactions that manipulates both volume and price of the assets in the NFT ecosystem.

Price Estimation, A value estimation & analytics for Digital Assets (NFTs) using AI to empower the community to embrace and value their assets in real-time.

Forgery Detection, An AI model that flags forgeries, copycats and bootleg digital art contents thereby protecting the artists and their creations.