Still a mystery to many French people, NFTs are a new bet for many Internet users. But the risk of losing everything is significant.
These are the three letters that make you question, dream or disturb you. NFTs (“non-fungible tokens”, or “non-fungible tokens” in French) have been talked about for several months. Despite a concept that remains too vague for most numbers, they have already attracted 3.5% of French people. But venturing into NFTs often turns into a high-risk gamble. Explanation.
• What is an NFT?
On paper, the definition of an NFT is elementary: it is nothing more and nothing less than a certificate of digital property. Namely a document that proves that a person owns a physical or virtual object.
The term “non-fungible token” refers to the fact that unlike cryptocurrencies like Bitcoin, an NFT is unique. If a Bitcoin is worth any other Bitcoin, then an NFT can always be identified and certify 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 Brandler, executive of specialized company Chainanalysis with BFMTV.
• What is NFT?
“There’s a lot of confusion about what an NFT is,” Willem van den Brandelaer admits, however. Due to confusion, NFT is sometimes equated with the object to which it is attached – for example a work of art. By analogy, this error would be equivalent to confusing the sales receipt with the product for which it seeks to purchase.
NFT is also not a certificate of intellectual property over a work of art. As with the sale of a classic painting, the buyer does not benefit from reproduction rights on the work itself. Similarly the purchaser of a disc does not receive royalties on the pieces of music it contains.
Additionally, an NFT is by no means an exclusive right to a digital artwork. If it is available online, for example on an auction site or social network in JPG format, the image associated with the NFT can be saved and used by anyone for free.
• What is an NFT used for?
Without a monopoly over the artwork associated with it, ownership of an NFT amounts only to being recognized as the sole owner of the work, but without having any advantage over other Internet users, who are free of 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 can benefit from.
In this context, an NFT has no underlying function and is a purely speculative asset. For the buyer, the goal is to later resell it 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 to be used rather than just artistic speculation” speculates Wayne Simonin, whose YouTube channel has now surpassed 500,000 subscribers popularizing the topic of cryptocurrency.
Although NFTs are often associated with artworks, these certificates of ownership can be attached to any object. For example, the Coachella music festival recently sold tickets by 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 goes up.
• Why do so many people want to invest in NFTs?
“The starting point of this frenzy is in March 2021, selling an NFT from Beeple for $69 million. At that time there were less than 10,000 people who had NFTs, then there was a case of conversion of people who had entered the cryptocurrency for two years and who were not aware of this phenomenon” recalls company executive Jean-Michel Pailhon. Ledger, a specialized cryptocurrency storage, is itself an NFT collector.
“It is an attractive market that is growing very fast. In 2020, we had a transfer of 106 million dollars, in 2021, we went over 44 billion” recalls Willem van den Brandelaer.
Apart from the purely speculative side, the NFT craze was carried by some stars such as the footballer Neymar or the singer Justin Bieber. By offering NFTs linked to monkey drawings – immediately raising their prices, they inspired many of their fans.
“NFTs are both an object belonging to a community and valuable to some. There is a status side, like someone who wears a Rolex will play on their status. In social networks, hundreds of people will know that you have an NFT” summarizes Jean-Michel Pilhon.
• What are the main risks of NFTs?
In buying a work of art, the main risk is the loss of value of this same work. Yet this usage seems to make some Internet users dream of making a fortune. But the lack of knowledge in this area, which now seems accessible to everyone, can cause major risks.
“As in the traditional world, very few jobs will have value. When it’s no longer fashionable, it can quickly go the other way” tempers Wayne Simonin on BFMTV.
But the expert pointed to another big risk: a fall in the price or interest of Ethereum, the cryptocurrency used to exchange NFTs, and in which buyers are forced to invest to enter the 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 widespread presence of scams, set up by miscreants wishing to take advantage of the frenzy surrounding NFTs.
• How to recognize an NFT scam?
Among the major NFT-related scams, experts cite “wash trading”. Creating an NFT and then creating multiple accounts to buy digital assets from yourself at increasingly high prices is a scam. The goal then is to simulate market interest by creating a fake wave in the NFT’s price.
In order to detect these manipulations, a good knowledge of technological tools is essential, starting from 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.
“For example, we can compare a transaction 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 price evolution is based on a small number of transactions. A sign that might suggest it’s a scam,” specifies Wayne Simonin.
Willem van den Brandelaar added, “There is also the risk that the community that promotes these NFTs on social networks or Discord are actually bots giving the impression of a craze. For the potential buyer, it is therefore best to spend time studying the enthusiasts of an NFT collection.
Another major risk concerns the proliferation of NFTs based on works whose seller is not the actual author. On paper, nothing prevents an unscrupulous internet user from saving any image or video found on the internet as NFT for resale.
On the OpenC exchange platform, the most popular in the NFT market, 80% of asset certificates are thus associated with fraudulent activity. For the buyer, it is essential to find out about the validity of the seller’s account and the history of the work he wants to achieve.