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Crypto Scams Proliferate
Last Sunday, a Redditor asked an odd question:
“Did I just lose half a million dollars by sending WETH to WETH’s contract address?”
Unfortunately so.
Though the Reddit post was quickly deleted, the evidence of an accidental 195.2 WETH ($501,358) burn remains on the blockchain. Users quickly deduced that an unintuitive contract rule was the culprit.
The unforced error isn’t a rarity. Thousands of new NFT buyers find themselves paying $60 to $100 in fees to buy $40 pieces of artwork. And many more will find their hard-bought NFTs worth precisely zero in several years’ time.
But many “mistakes” are also caused by scam artists. Five NFT rug-pulls alone have already netted fraudsters at least $4 million this year. And token pumps continue to proliferate on Binance and other exchanges while regulators look the other way.
You already know the two NFT projects I actually recommend — Decentraland (CCC:MANA-USD) and Nike’s (NYSE:NKE) RTFKT. So today, we’ll examine the other end of the spectrum:
The 3 NFT projects to avoid.
Wash Trading Takes to the Stars
When InvestorPlace’s Brenden Rearick first wrote about NFT exchange LooksRare (CCC:LOOKS-USD), he noted how the new firm was setting the NFT world on fire.
“The platform is blowing up in popularity just days after its launch… it promises to challenge the dominance of NFT trading platforms like OpenSea”
It soon became apparent, however, that much of the site’s trading consisted of “wash sales,” the practice of selling pieces to yourself over and over again.
Why would anyone do that? To earn trading rewards from LooksRare.
By dispensing $15 million per day to high-volume traders, the exchange unwittingly turned itself into a hub for scams and self-promoters. A study by CoinTelegraph found that a wash trader who spun $186 million on LooksRare generated $6.2 million in rewards while paying only $3.7 million in fees. The $2.5 million net profit would translate into a 12,661% annual return.
That’s precisely what’s happening with NFT projects like Meebits, a collection that comically generated $5 billion in sales in the month of January.
Of course, not everyone is so easily fooled by such shenanigans. But as the NFT gold rush continues, more complex scams will bilk investors out of their savings. Here are three projects to avoid.
Meebits
The original “wash sale” NFT tops my list of projects to avoid.
In July 2021, a Meebits NFT sold for a staggering 1,000 ETH, or $2.1 million. The sale surely raised some eyebrows: the price tag represented a 225x premium over the average Meebit at the time.
But it certainly got attention. Sites from BeInCrypto to RobbReport picked up the news, while social media collectively ogled at the price.
Since then, other Meebits have become a de-facto asset for wash trading. Meebits now routinely make round-trips between wallets for $15 million or more, generating 15x greater trade volume than the Bored Ape Yacht Club, according to DappRadar. In the past-30 days, the project has comically generated $5 billion in sales.
The cycle will eventually end. Once scammers offload their pieces, there’s little reason for wash trades to continue. Until then, make sure you’re not drawn in by “cheaper” Meebits to get in on the fun.
Terraforms by Mathcastles
A land-grab knockoff with more dollars than sense
When I recommended Decentraland’s land NFTs, I did so knowing that the digital properties were 1) in limited supply and 2) in high demand. Corporations have already shelled out millions purchasing virtual Decentraland plots in anticipation of future visitors.
Terraforms takes that faith to another level. Its “land plots” are merely animated pixels on a 2D page.
Amazingly, wash sale investors don’t seem to care. Combined, these traders have created $1.6 billion in volume over the past week, with an average transaction price of $1.1 million.
That’s certainly gained regular investor attention. Non-wash-sale land now averages 1.3ETH ($3,650), 6x higher than in mid-December. But for those looking for real long-term value, this is a rising star to ignore.
Dotdotdots
Finally, there’s dotdotdots, “strange cultish creatures that live inside solidity.”
I can’t quite explain what “solidity” means, besides sharing the same name as an object-oriented programming language.
Nevertheless, wash traders have put the project on steroids and pumped prices to $1.3 million per piece. Investors on LooksRare can now find images for sale at 4,380 ETH ($12 million) or more.
High prices, of course, are simply a mirage. Dotdotdots listed on rival exchange OpenSea are available for a mere $600. And as investors wise up to the pump-and-dump, don’t be surprised if the floor falls out of the cultish market.
Bonus: LooksRare (LOOKS)
The culprit behind much of the current wash trading is LooksRare, an exchange that launched with a “vampire attack” on OpenSea. By offering tokens to new users, the upstart attempted to poach pre-existing projects from the well-established exchange. In the process, it kickstarted an entire industry of wash traders vying for the site’s $15 million daily rewards.
The absurd trading has also distorted wider markets. I previously mentioned that regular Terraforms prices are up 6x from mid-December — the same is true for many other projects too.
Assume I start an NFT collection of pixelated 3D characters. And rather than let the project languish in obscurity, I begin trading pieces with myself for $13,500… $100,000… $50 million…
Suddenly, my project looks as if it’s blowing up.
Of course, none of this matters much to LooksRare. The platform has already earmarked 20% of its tokens for its treasury and founding team; staking fees are paid out of the 2% sales commissions.
For investors though, that means you probably want to steer clear of LooksRare’s native token, LOOKS. When exchanges are incentivized to fool the traders they serve, it’s only a matter of time before enough people lose money for the scheme to unravel.
The NFTs Fading into Obscurity
Loot… MekaVerse… 0n1 Force… Many NFT projects seem to disappear after an initial spark.
That’s not by accident. Most NFT drops are highly hyped events. Sales for NFT project Loot reached $192 million in its first week, and MekaVerse wasn’t far behind.
After the initial boost, many of these projects invariably fall off the map. In the past seven days, Loot has generated just $500k in sales, down 99.7% from its peak. And pity the early-stage MekaVerse investor — average sale prices have collapsed from $21k to $2.7k as trading volume has dried up.
The reason for the decline is straightforward: many of these lower-quality projects live on hype alone. Their artistic merits are questionable at best, and few investors care to buy them on the secondary market.
Even higher-quality projects aren’t immune. Art Blocks, a highly promising Ethereum project, has seen average sale prices tumble from $15,000 in September to $2,600 today, according to NFT site Nonfungible. So if you’re looking to profit from NFTs, make sure you’re flipping those on the rise.
History on Repeat
Today’s NFT scams are nothing new. Dot-com frauds proliferated in the later stages of the 1999 tech bubble; firms from Pixelon to WorldCom would use investor disbelief to orchestrate multi-million dollar scams. And mortgage fraud in the mid-2000s generated millions for fraudsters at the expense of straw buyers. As early as 2004, the FBI warned that “the growing epidemic of mortgage fraud in the country… could eventually cause the collapse of the housing market.”
These days, the NFT boom has unleashed the same forces. Justin Bieber has turned into an NFT “Belieber” with a $1.3 million purchase of a Bored Ape, blurring the line between scams and legitimate trades. And if you’re not sure whether the market has gone insane, consider this:
The average American now has to work 23 years (assuming they saved 100%) to afford the same jpeg image that Mr. Bieber bought on a whim.
P.S. Do you want to hear more about cryptocurrencies? Penny stocks? Options? Leave me a note at moonshots@investorplace.com or connect with me on LinkedIn and let me know what you’d like to see.
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On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing.
