Who This Is For

Anyone who's heard about NFTs and wants to understand what they actually are, how they work, and what risks exist in this space. This guide provides education without encouraging participation or making predictions about value.

What Are NFTs?

NFT (Non-Fungible Token): A unique digital token on a blockchain that represents ownership or proof of authenticity of a specific item.

Fungible vs. Non-Fungible

Fungible: Interchangeable, identical value

• Example: Dollar bills—any $1 bill = any other $1 bill
• Example: Bitcoin—1 BTC = 1 BTC (doesn't matter which one)

Non-Fungible: Unique, not interchangeable

• Example: House deed—your house ≠ neighbor's house
• Example: Concert ticket—seat A1 ≠ seat B5
• Example: Artwork—one painting ≠ another painting

NFTs are non-fungible: Each token is unique and not interchangeable with another.

How NFTs Work

Technical basis:

• Smart contract on blockchain (typically Ethereum)
• Token has unique identifier
• Metadata points to asset (image, video, etc.)
• Blockchain records ownership history

Important distinction:

• NFT = token on blockchain
• Asset (image/video) = usually stored elsewhere (IPFS, server, etc.)
• You own the token, not necessarily the underlying asset rights

What You Actually Own

When you buy an NFT, you typically own:

• A token on the blockchain
• A record saying you own that token
• Often, ability to display or resell the token

You typically DON'T own:

• Copyright to the image
• Intellectual property rights
• The image file itself (it's just linked)
• Commercial usage rights (unless explicitly granted)

Example: You buy Bored Ape NFT #1234.

• You own token #1234
• You can prove ownership on blockchain
• You can resell token #1234
• But you don't own copyright to the image (though BAYC grants commercial rights in this specific case)

This confuses many buyers.

How NFTs Are Created and Sold

Minting

Minting: Creating a new NFT by deploying smart contract.

Process:

1. Creator uploads image/asset
2. Creates smart contract on blockchain
3. Contract generates unique token ID
4. Metadata links token to asset
5. NFT now exists and can be sold

Costs: Creator pays gas fees to deploy contract.

Primary Sales

Initial sale by creator:

• Direct sale at fixed price
• Auction
• Drop/release event

Creator sets:

• Price or starting bid
• Royalty percentage (typically 2.5-10%)
• Number of editions (if multiple copies)

Secondary Sales

Reselling NFTs:

• Listed on NFT marketplaces
• Sold to other collectors
• Original creator typically gets royalty percentage
• Seller pays marketplace fee (2-5% typically)

Note: Royalties not always enforced (depends on marketplace).

Marketplaces

Major NFT marketplaces:

• OpenSea (largest)
• Blur
• Rarible
• Foundation
• SuperRare

Functions:

• List NFTs for sale
• Browse/discover NFTs
• Facilitate transactions
• Show ownership history
• Provide marketplace for trading

NFT Use Cases (Claimed and Actual)

Digital Art

Claim: NFTs enable digital art ownership and creator compensation.

Reality:

• Some artists have benefited
• Most NFTs have little to no value
• Art world hasn't fully embraced NFTs
• Speculation dominates over appreciation
• Copyright/usage rights often unclear

Legitimate use: Some artists successfully sell digital work as NFTs.

Problem: Vast majority of NFT "art" is low-effort, speculative, or copied.

Profile Pictures (PFPs)

What they are: NFT collections designed as social media avatars.

Examples:

• Bored Ape Yacht Club
• CryptoPunks
• Azuki
• Doodles

Claim: Community membership, status symbol, identity.

Reality:

• Peak prices were driven by speculation
• Most collections lost 90%+ of value
• "Community" often disperses when prices fall
• Status symbol aspect has faded

At peak (2021-2022): Some sold for hundreds of thousands or millions of dollars.

Currently: Most worth small fraction of peak, many worthless.

Collectibles

Digital trading cards, memorabilia:

• Sports moments (NBA Top Shot)
• Gaming items
• Music collectibles

Potential: Verifiable scarcity, provable authenticity.

Reality:

• Only valuable if others value them
• Most have collapsed in value
• Centralized control (company can shut down)

Gaming

Claim: Own in-game items as NFTs, use across games.

Potential benefits:

• True ownership of items
• Transfer between games
• Resale market

Reality:

• Few games successfully implemented
• "Play-to-earn" largely failed
• Game companies control usefulness
• Speculation undermined gameplay
• Most gaming NFTs worthless

Utility and Access

Claim: NFTs grant access to events, content, memberships.

Examples:

• Concert tickets
• Exclusive content access
• DAO membership

Potential: Verifiable ticketing, proof of membership.

Reality:

• Traditional systems work fine
• NFT adds complexity without clear benefit
• Few successful implementations
• Speculation often dominates utility

Proof of Authenticity

Claim: Verify authenticity of physical items.

Use case: Link physical luxury goods to NFT certificate.

Potential: Combat counterfeiting.

Reality:

• Requires trust in issuer
• Doesn't prevent physical counterfeits with fake NFTs
• Limited adoption
• Traditional authentication works

NFT Risks

1. Extreme Volatility and Value Loss

What it is: NFT prices are highly speculative and volatile.

Reality:

• Most NFTs purchased at peak have lost 90%+ of value
• Many NFTs have zero bids, completely illiquid
• No fundamental value—purely based on what someone will pay

Historical examples:

• Floor prices of major collections dropping 80-95%
• Individual NFTs bought for six figures worth thousands or less
• Entire collections becoming worthless

Risk: What you pay today may be worth nothing tomorrow.

2. Illiquidity

What it is: Can't easily sell NFT for its supposed value.

Problems:

• Need to find specific buyer
• May have to accept much lower price
• Some NFTs have zero bids ever
• Market can dry up completely

Unlike fungible crypto:

• Bitcoin can be sold instantly for market price
• NFTs may sit unsold for months or forever

You can be stuck holding worthless asset.

3. Smart Contract and Technical Risks

Metadata hosting:

• Image usually stored off-chain (not on blockchain)
• If hosting service shuts down, image disappears
• Left with token pointing to dead link
• Even IPFS storage not guaranteed permanent

Smart contract issues:

• Bugs can lock NFTs
• Exploits can steal NFTs
• Upgradeable contracts can change rules
• Centralized control points

You may lose access to what you thought you owned.

4. Copyright and IP Issues

Confusion about rights:

• Buying NFT typically doesn't transfer copyright
• Can't necessarily use image commercially
• Original artist retains rights (usually)
• Terms vary by project

Stolen art:

• Artists' work minted as NFTs without permission
• Buyers unknowingly purchase stolen art
• Original artist can issue DMCA takedowns
• NFT value destroyed

Buyer often has no legal recourse.

5. Wash Trading and Market Manipulation

Wash trading: Buying/selling to yourself to fake activity and price.

How it works:

1. Own NFT in wallet A
2. "Sell" to yourself in wallet B for high price
3. Creates appearance of value and activity
4. Trick real buyers into purchasing

Very common in NFT space:

• Inflates apparent trading volume
• Fakes price history
• Hard to detect
• Creates false sense of value/demand

You may be buying into manipulated market.

6. Scams and Fraud

Extremely common in NFT space:

Fake projects:

• Promise utility/roadmap
• Collect money from mint
• Disappear (rug pull)

Fake marketplaces:

• Phishing sites mimicking OpenSea
• Steal connected wallet contents

Fake NFTs:

• Counterfeit versions of popular collections
• Slightly misspelled collection names
• Identical images, different contracts

Discord/Twitter hacks:

• Official accounts compromised
• Post fake mint links
• Steal funds from community

Pump and dumps:

• Coordinate buying to inflate price
• Insiders sell to retail
• Price crashes

More: Common Crypto Scams: How to Avoid Them

7. Royalty Enforcement Issues

The problem:

• Creators set royalties (e.g., 10% on resales)
• Some marketplaces don't enforce them
• Buyers can avoid royalties
• Creators don't receive promised ongoing income

Debate in NFT community about royalty enforcement.

8. Environmental Concerns

Energy usage:

• Minting and trading NFTs on Ethereum consumed significant energy (pre-Merge)
• Post-Merge, Ethereum more efficient
• Still criticism of NFT environmental impact

Not purely financial risk but reputational and ethical consideration.

9. Regulatory Uncertainty

Legal gray area:

• May be deemed securities (legal issues)
• Tax treatment unclear in many jurisdictions
• Consumer protection laws unclear
• Intellectual property disputes

Future regulation could:

• Restrict NFT trading
• Impose tax obligations
• Create legal liability
• Affect value

10. Celebrity and Influencer Involvement

Common pattern:

1. Celebrity launches NFT project
2. Fans buy in
3. Celebrity moves on
4. Project abandoned
5. NFTs worthless

Problem:

• Celebrity has no long-term commitment
• Fans left holding bag
• No accountability

Many celebrity NFT projects have failed.

NFT Scams in Detail

The Fake Mint

Scam:

1. Create fake website for popular upcoming NFT project
2. Mimic real project's design
3. Promote on social media
4. Collect money from fake mint
5. Buyers receive nothing or worthless NFT

How to avoid:

• Only use official website (verify URL)
• Bookmark official site
• Verify contract address
• Check official social media

The Rug Pull

Scam:

1. Create NFT project with roadmap
2. Build hype and community
3. Sell out mint
4. Abandon project
5. Disappear with funds

Red flags:

• Anonymous team
• Unrealistic promises
• Copied art
• No clear utility

The Pump and Dump

Scam:

1. Group coordinates buying
2. Creates appearance of demand
3. Price rises
4. Retail buyers FOMO in
5. Insiders dump
6. Price crashes

How to spot:

• Sudden unusual activity
• Heavy promotion
• Suspicious trading patterns

The Account Hack

Scam:

1. Hack project's Discord/Twitter
2. Post fake mint announcement
3. Users click malicious link
4. Wallets drained

How to avoid:

• Verify announcements on multiple official channels
• Be suspicious of urgent mint announcements
• Never click links in Discord DMs
• Verify contract addresses independently

The Phishing Site

Scam:

1. Create fake OpenSea or other marketplace
2. Get you to connect wallet
3. Approve malicious transaction
4. Drain wallet of all NFTs and tokens

How to avoid:

• Bookmark real marketplace
• Check URL carefully
• Verify SSL certificate
• Don't click random links

More: Phishing and Fake Support

Red Flags for NFT Projects

Avoid projects with:

• [ ] Anonymous team with no accountability
• [ ] Copied or low-effort art
• [ ] Promises of guaranteed returns
• [ ] Extremely high mint price
• [ ] Unrealistic roadmap
• [ ] Heavy use of buzzwords without substance
• [ ] Pressure to buy quickly
• [ ] Celebrity involvement without real commitment
• [ ] No clear utility or purpose
• [ ] Pre-mint hype without substance
• [ ] Fake social media engagement (bought followers)
• [ ] Discord server full of "wen moon" talk

If You Do Interact with NFTs

Harm reduction approach:

1. Extreme Caution and Small Amounts

• Only allocate what you can afford to lose completely
• Assume value will go to zero
• Treat as high-risk speculation, not investment

2. Verify Everything

• Official website URLs
• Contract addresses (check on Etherscan)
• Team information
• Social media accounts (verify checkmarks)

3. Use Separate Wallet

• Don't use wallet containing significant funds
• Burner wallet for NFT interactions
• Limits damage from scams

4. Understand What You're Buying

• What rights do you get?
• What's the actual utility?
• Where is the image hosted?
• What can you actually do with it?

5. Research the Project

• Who's the team?
• What's the track record?
• Is the art original or stolen?
• What's the actual roadmap?
• Does utility make sense?

6. Be Suspicious of Hype

• FOMO is not an investment strategy
• Hype peaks often coincide with price peaks
• Take time to evaluate
• Don't rush into mints

7. Check Transaction Before Signing

• Verify contract address
• Understand what you're approving
• Don't blindly sign transactions

More: Safe Transaction Habits

8. Expect to Lose Money

• Most NFTs lose value
• Illiquidity is common
• Finding buyers is hard
• Have exit strategy

NFT Tax Considerations

In many jurisdictions, NFTs are taxable:

Buying NFT: Typically not taxable event (though gas fees not deductible for personal use)

Selling NFT: Capital gain or loss

• Calculate gain/loss from purchase price to sale price
• Short-term vs. long-term depends on holding period

Creating and selling NFT: May be ordinary income

Receiving NFT as gift/airdrop: May be taxable income at fair market value

Keep detailed records:

• Purchase price and date
• Sale price and date
• Gas fees paid
• Any airdrops received

Consult tax professional—NFT tax treatment complex and evolving.

More: Keeping Records: Tracking Template

The Bigger Picture

NFT Market Reality

Peak (2021-2022):

• Billions in trading volume
• Six and seven-figure sales
• Mainstream media coverage
• Celebrity involvement
• FOMO frenzy

Current state:

• Dramatically reduced trading volume
• Most collections lost 90%+ of value
• Media coverage shifted to criticism
• Many projects abandoned
• Market maturation or bubble burst (depending on perspective)

What Actually Has Value?

Honest assessment:

• Top collections (CryptoPunks, BAYC) still trade but at fraction of peaks
• Most other NFTs have little to no market
• Vast majority of NFTs minted are worthless
• Speculation was primary driver, not utility or art appreciation

The Technology vs. The Hype

NFT technology has potential for:

• Verifiable ownership records
• Digital scarcity
• Creator royalties (if enforced)
• Authenticity verification

But current NFT market is mostly:

• Speculation
• FOMO-driven
• Scams and manipulation
• Get-rich-quick mentality

Technology may have future use cases, but current market doesn't reflect rational value.

Alternatives to NFTs

If you're interested in supporting creators:

• Direct purchases: Buy art/music directly from creators
• Patreon/subscriptions: Ongoing support
• Commissions: Pay for custom work
• Traditional purchases: Buy physical or standard digital goods

Benefits:

• Creator gets higher percentage
• Clearer ownership rights
• No blockchain complexity
• No speculation element
• Actual usable product

You can support creators without NFTs.

Key Takeaways

• NFTs are unique tokens on blockchain, typically representing digital art or collectibles
• You own the token, not necessarily copyright or the image itself
• NFT market is highly speculative, volatile, and full of scams
• Most NFTs have lost significant value from peaks
• Illiquidity is common—may not be able to sell
• Risks include: value loss, scams, technical issues, unclear rights, market manipulation
• Use separate wallet with minimal funds if interacting
• Verify everything before purchasing or signing
• Expect to lose money—NFTs are extreme speculation
• Technology may have potential, but current market is problematic

Bottom line: NFTs are extremely high-risk, speculative, and scam-filled. For most people, avoiding NFTs entirely is the safest choice.

Further Reading

• Common Crypto Scams: How to Avoid Them
• Phishing and Fake Support
• Safe Transaction Habits
• DeFi Explained: What It Is and the Risks