When it comes to cryptocurrency and NFTs, there’s no such thing as being too safe.
OpenSea is generally safe as a platform- the true security weakness is going to be the wallet you store your NFTs in, your handling of your seed phrase, and making sure you set up 2FA wherever you go. There are risks other than theft with NFT trading that I’ll outline below.
Think about the American ‘Wild West’ in the immediate post-civil war period. The frontier outpaced the law- people moved ever westward, creating prosperous towns and settlements. However, the US government (a very small entity in the 19th century) couldn’t foster the speed or money to provide law enforcement resources. Basic services like sewage and healthcare were all but out of reach. Murder, banditry, disease, alcoholism, domestic abuse and more were everywhere. Although The American West made many a millionaire and ultimately prospered (the top 5 fastest growing states in the US are all in the west), it came at a steep price for many.
What are the risks with NFTs?
It’s the same with cryptocurrency and NFTs right now. But instead of alcoholism and gunfights, we’ve got wallet hacks, fake collections, and steep fees. I’ll go through the exact nature of all the risks below, but here are the main categories:
- Fraudulent collections
- Wallet hacks
- NFT price volatility
- Platform security breaches
NFT Price Volatility
Although many don’t consider this one underneath the ‘safety’ part of a platform, I think it absolutely should be. Even in strong NFT collections (whose criteria I’ve outlined so you can spot them) , price volatility can be ten to one hundred times the volatility of public stock markets.
When an insider gets an NFT cheap at a collection’s ‘minting’ event and the collection goes public and increases in value, there’s little in the way of that person turning around and selling it. This is partially because there’s no centralized power regulating the NFT market. No government, no SEC, no real way to track down and punish bad actors or collection insiders who sell off their shares the moment the collection is released.
At least in regulated markets like the stock markets, insider share holders often have legal agreements that don’t allow them to sell after a certain time period.
The fees charged by OpenSea and Coinbase are patently outrageous. OpenSea charges 2.5% of every NFT sale you make- and Coinbase takes a similar amount through fees and ‘slippage’ (meaning they quote higher and lower prices than the cryptos actually are, to their benefit).
These fees cut directly into any gains you make from buying and selling NFTs. Let’s say your NFT gains and losses even out- you’re still likely to end up losing money overall if you’re frequently buying and selling them by paying these fees. Fees aren’t technically a ‘risk factor’ because they’re known ahead of time. But NFT traders should know that this isn’t Schwab or Robinhood- there are some pretty steep fees. And we have’t even gotten to Ethereum gas fees yet.
To add insult to injury, you’ve got to pay gas fees on OpenSea if you’re trading items with an Ethereum based collection (which most are). In the process of buying and selling my Lazy Lions NFT (which I took a small loss on), I paid around $100 in the buying and selling with Ethereum gas fees. By other convention investing standards- this is insane. This won’t be an issue once the new layer of the Ethereum network emerges, but for now it’s created some massive friction for those who’re looking to buy and sell NFTs. Imagine if you wanted to buy an NFT that’s listed for $10. You make the clicks to buy it on OpenSea, only to be shown by your MetaMask wallet that the transaction is going to cost you $50 in Ethereum gas fees. Would you still do it? Most wouldn’t.
For now this sucks and is a huge barrier, but the plus side could be that NFTs become much more popular than they even are now after the new Ethereum layer is released and transaction fees go down significantly.
Fraudulent & otherwise bad collections
Many NFTs like Street Fighter, Neo Tokyo, and NHL NFTs capitalize on intellectual property and the image of famous people. Some, but not all, of these collections are legit. OpenSea fights against these fraudulent collections by asking its users to look for the blue verification check mark next to collections.
If the collection you’re looking at has any intellectual property or branding or involves images of famous people, make sure to double check for this blue check mark next to the collection name.
Collections can also just suck. How can you tell?
In addition, you should look for the following when deciding whether an NFT collection is legitimate or not:
The team behind it- are they reputable?
Does the project have a good website?
Is there a clear roadmap?
Do they have partnerships with major brands or organizations?
The answer to at least a couple of these should be a clear ‘yes’ in my mind.
Wallet hacks & platform security breaches
OpenSea recently had a high profile phishing attack where hackers prompted users on the platform to ‘migrate’ their NFTs to a new interface lest they be deprecated. The attack resulted in the loss of $1.7M in assets from users on the platform. Obviously, never move your NFTs to an unknown wallet and never give your private keys or seed phrase to anyone.
Additionally, MetaMask is a target for hackers since MetaMask is a web-based application and exists on your computer. This is a big reason why I recommend a Ledger Wallet for storing your NFTs- to send anything anywhere the wallet requires you to physically interact with your wallet to confirm.
The NFT and crypto space is still experiencing growing pains and has some ground to make up with respect to security. That’s why hardware wallets like the Ledger Nano X are so popular (I highly recommend getting one!). These devices store your private keys offline, making them virtually impossible to hack. However, hardware wallets can be expensive, and they’re not always convenient to use. Software wallets like MetaMask and MyEtherWallet are a more affordable option, and they’re still fairly secure. The main downside of software wallets is that they’re not as secure as hardware wallets, but they’re still a good option for people who are looking to save money.