So, you’ve finally decided to take the leap and buy your very first non-fungible token (NFT).
You’ve created your cryptocurrency wallet and loaded it with Ethereum.
You’ve done all your research. You’ve spent hours scouring communities on Discord and Twitter and acquainted yourself with the key voices in the NFT ecosystem.
Suddenly, a collection drops that’s attracting a lot of positive attention. The marketing is great, the creators have heaps of followers on Twitter and the project is getting healthy engagement.
The first mint does well and a second is announced. Seeing your chance, you jump in and buy early, only to learn shortly after that the project team has taken everyone’s money and run.
Known as a rug pull, these shams are catching out investors in big numbers.
One Sydney man told Yahoo Finance he lost around $250 in his first NFT purchase when the creators bailed on the lot. Others came off worse - he said some in the Discord chat group lost a whole years’ worth of savings.
The crooks pulling these heists are also becoming increasingly brazen.
Balloonsville's last tweets before the account was deleted pic.twitter.com/aZezBnCaE2
— 414 Wallows Gate (@mxzla) February 6, 2022
The team claimed to have used paid actors to dupe buyers and the marketplace, and called on the marketplace to refund buyers because they, “were too stupid to ask for ID”.
Even experienced NFT investors fall into rug pull traps
Seasoned NFT investor Amy Stroud has also fallen victim to a rug pull.
She said even competent investors can get scammed if they don’t do their due diligence. She got caught out when a Twitter influencer she knew suggested a particular project and there was a time limit to buy in.
Stroud discovered it was a rug pull when no one in the Discord group would respond to her questions.
Another thing to watch out for is knockoffs of highly anticipated NFTs that scammers will put on marketplaces leading up to the launch.
Following official links on Twitter accounts or web pages is always a good idea, Stroud said.
But even authentic communities can be compromised. Scammers can pretend to be the server in a legitimate NFT community on Discord and trick people into clicking through to a link by promising an early drop.
Interestingly, not all rug pulls start off as nefarious, Stroud said. Sometimes the project team simply overcommit and disappear when they realise they can’t deliver what was promised in the project roadmap.
Doing background research on the project team can help. For example, if someone is promising to deliver a game, you might look for past game development experience.
A large Discord community can also be a red flag as it could indicate members have been bought.
Stroud said that while there was certainly money to be made and great artwork to purchase as NFTs, the marketplace was still “a bit of a wild west” and came with serious risks.