In this article, we'll highlight the risks associated with buying and selling NFTs - and the necessary details to keep in mind with how transactions are conducted.
Cryptocurrency and the Blockchain
In order to discuss the risks, it's important to define what cryptocurrency is and why crypto goes hand and hand with NFTs on the blockchain. If you'll recall from our glossary here, the blockchain is a digitized, decentralized, public ledger used for cryptocurrency transactions.
John Thackeray from writing on behalf of the Risk Management Association defined the blockchain as, "constantly growing as “completed’ blocks” (the most recent transactions) are recorded and added to it in chronological order, it allows market participants to keep track of digital currency transactions without central record keeping. Each node (a computer connected to the network) gets a copy of the blockchain, which is downloaded automatically."
The risks associated:
When you conduct transactions on the blockchain, which is how NFTs are purchased and sold, it's important to note the permanency involved with these transactions.
Transactions are irreversible. Meaning, after a transaction is conducted on the blockchain, they are finalized and cannot be reverted to before the purchase was made. This highlights the need for extra security to be taken on your part as there is very little room for recovery if your private keys for your wallet are lost or stolen. If an outside party gains access to your wallet for example and is able to successfully complete a transaction on the blockchain, say purchasing an NFT, your money is lost. If those outside parties gain access, those transactions are conducted anonymously, so, no transactions nor accounts on the blockchain are associated with real-world identities.
Irreversible: After confirmation, a transaction cannot be reversed, there is no safety net.
Anonymous: Neither transactions nor accounts are connected to real-world identities, everything is digitalized with access by means of the Internet.
Security: Do not share your passwords or private wallet keys. Keep that information as secure as possible to avoid any of your information being stolen or compromised.
It's important to highlight what phishing scams are and how they can be avoided. Please check out our "How to recognize and avoid phishing scams" article here for specific details.