If something is fungible, it means it is replaceable. A fungible item, therefore, can be substituted or exchanged with another item that is identical or has the same value. For example, a £20 note is the same as any other £20 note and can be exchanged for such a note or, for example, for four £5 notes or 20 one-pound coins. This is the same for cryptocurrency - one bitcoin can be exchanged for another. An NFT, being a non-fungible token, does not work in this way. Every NFT is a unique series of numbers stored on the blockchain ledger and cannot be substituted for something else. It is important to understand how a Non Fungible Token is actually created. An artist creates a digital good - an image, video or anything that lives in the online world. The artist would then create a token on a blockchain that supports smart contracts, such as Ethereum, Cardano and Solana. This token would hold within it information about the digital goods that are being sold. This information includes, for example, the token name, token symbol and a unique hash that proves the authenticity of the NFT. The digital goods are not stored inside the token itself. The token stores only attributes relating to them. The NFT will point to where the file can be found. Once the token is created, the artist can sell it to someone else and that person will be the new owner of it. As such, the information held on the blockchain will include who owns the original asset, who it was sold to and when it was sold. It is, therefore, possible to prove who owns the NFT at any time and trace its prior-ownership history. As this information is on the blockchain, it is encrypted, ensuring its authenticity and the NFT’s scarcity. Hence, an NFT is a token that acts as a digital certificate of authenticity.

1. Risk of non-fungible token
In brief:
We study one of the earliest and largest NFT collections and find that NFTs have higher returns
than traditional financial assets. However, investing in NFTs comes along with extremely high
volatility, leading to a comparable Sharpe ratio to the NASDAQ index. NFT prices surge when
there is a drastic increase in demand for alternative investments and a search for yield in a low
interest rate environment. The pricing of NFT also largely depends on a token’s scarceness and
investors’ aesthetic preference. Overall, we provide the first comprehensive analysis that NFTs
serve as a novel investment vessel in this Fintech era.
Introduction:
If something is fungible, it means it is replaceable. A fungible item, therefore, can be substituted
or exchanged with another item that is identical or has the same value. For example, a £20 note is
the same as any other £20 note and can be exchanged for such a note or, for example, for four £5
notes or 20 one-pound coins. This is the same for cryptocurrency - one bitcoin can be exchanged
for another.
An NFT, being a non-fungible token, does not work in this way. Every NFT is a unique series of
numbers stored on the blockchain ledger and cannot be substituted for something else.
It is important to understand how a Non Fungible Token is actually created. An artist creates a
digital good - an image, video or anything that lives in the online world.
The artist would then create a token on a blockchain that supports smart contracts, such as
Ethereum, Cardano and Solana. This token would hold within it information about the digital

2. goods that are being sold. This information includes, for example, the token name, token symbol
and a unique hash that proves the authenticity of the NFT.
The digital goods are not stored inside the token itself. The token stores only attributes relating to
them. The NFT will point to where the file can be found. Once the token is created, the artist can
sell it to someone else and that person will be the new owner of it.
As such, the information held on the blockchain will include who owns the original asset, who it
was sold to and when it was sold.
It is, therefore, possible to prove who owns the NFT at any time and trace its prior-ownership
history. As this information is on the blockchain, it is encrypted, ensuring its authenticity and the
NFT’s scarcity. Hence, an NFT is a token that acts as a digital certificate of authenticity.
NFT Collectability.
NFT’s have changed the digital asset market. Whereas physical collectable items, such as a
signed football shirt or trading card have value because they are rare and their authenticity can be
proven, this was not the case with digital assets – until now. Previously, digital assets could
easily be duplicated online, with there being no way of identifying who had the right to sell the
asset.
Anyone could download, for example, an image. That image could not be considered rare, and it
was impossible to identify clear property rights. But with ownership of the NFT able to be
proved and guaranteed by the blockchain, such transparency is an important part of the appeal of
NFT’s to investors.
A smart contract can be created to ensure that only one copy of a piece of digital art is made
available, ensuring its scarcity and keeping its value high. The smart contract can also be created
in a way that gives the artist royalties, securing the artist a cut of any future sale of the token.
Unlike how the blockchain operates with cryptocurrency, these terms that can be set for the sale
of an NFT mean that a particular piece of digital art can generate an income for the artist for
years to come.
Demand for NFT’s.
The process that we have just outlined regarding NFTs has prompted the recent increase in the
collecting and trading of digital assets. They can be listed for sale on one of a number of global
online NFT marketplaces. Such marketplaces can be easily accessed, and would-be buyers can
input various criteria to narrow down the search for what they want.
With bitcoin making gains of around 300% in 2020 a new group of crypto rich investors has
emerged, and these investors are looking to spend their cryptocurrency on the digital equivalent
of a supercar, Picasso or Patek Philippe watch.
For those not looking to invest in the long run, NFTs offer a way to make a quick return by
‘flipping’; making profit from the rapidly-increasing value of an NFT within days or even hours.

3. NFT Risks.
NFT’s have certainly given a major boost to trading in digital assets and have provided more
certainty and security than that which previously existed. However, despite their appeal and the
advantages associated with them, involvement in NFT’s will not always be risk free.
At present, NFT’s are not subject to regulation, which means there is little or no legal protection
for those who create, invest or trade in them. It should be remembered that not all platforms
selling NFT’s verify the identity of the seller. Platforms face difficulties when checking that the
seller is the original creator of the art, as anyone can access the digital marketplace and claim to
be the creator of the digital asset for sale.
Although some platforms have now started to employ AI software to scour public blockchains
and NFT platforms for identical examples of artwork - so that the artists can be alerted to any
suspicious matches - the risks still remain.
One high-profile example of this was when someone sold what was falsely claimed to be a
Banksy NFT for the cryptocurrency equivalent of £244,000 on the platform OpenSea. While this
case did see the purchaser have most of what they paid returned, it highlighted the dangers that
can be associated with NFT buying.
In addition to fake sellers, investors must also be aware of fake platforms claiming to sell
genuine NFT’s. These duplicitous platforms are set up to steal would-be NFT customers’ credit
card details and there is also the threat of phishing schemes and viruses draining digital wallets –
a practice dubbed as ‘sleep minting’. With NFT’s being unregulated, it can be difficult to track
funds. Scammers and hackers are increasingly exploiting security gaps in the rapidly-expanding
marketplace to make illegal gains.
Anyone wanting to purchase an NFT should also be aware of the possibility of being caught in a
sales frenzy bubble that sees prices rise rapidly before suddenly falling, leaving those who
bought at the top of the market-facing large losses. Additionally, there is the danger of “bit rot”
or “format rot”, where an image’s quality can deteriorate, file formats may no longer be opened

4. or websites fail; leaving an NFT owner with an asset that is decreasing in value or even
worthless.
Types of NFT Fraud.
Although NFT’s are a relatively new concept, they are already being used as a vessel for
carrying out a number of different types of fraud. Here, we detail some of the most notable
fraudulent practices that have involved NFT’s:
Tokenization:
This is the term used to describe the process of creating digital tokens that represent ownership
of a real-life asset. This occurs when someone takes an artist’s work without permission and
‘mints’ it, turning it into an NFT.
Wash trading:
Users manipulate transactions by trading with themselves or accomplices to create the illusion
of high demand for an NFT, to manipulate its value or raise its profile.
Insider trading: Where individuals use knowledge not available to the public for their own
financial gain.
Sleepminting: As mentioned earlier, while NFT’s are minted to a well-known artist, hackers
are sometimes able to have them transferred to their wallet. This is done in a sophisticated way
that does not trigger any security checks and convinces potential buyers that the hacker is
entitled to sell the NFT’s that they have obtained illegally.
Money laundering: Due to NFT’s being decentralized (involving peer-to-peer transactions
as opposed to using an intermediary such as banks or government institutions) and unregulated,
they provide a convenient way of laundering money. Unlike traditional art, NFT’s are not subject
to specific regulations that have been designed to prevent money laundering, including
providing.
ID documents to assist in validating ownership of property:
The prices of digital art are less influenced by factors that affect the price of a traditional piece of
art, such as age or condition. This means that pricing of NFT’s can be more subjective, giving
criminals the opportunity to launder their money through NFT trading without arousing as much
suspicion as they would if they bought more traditional assets.
Economic sanctions: The current unregulated status of NFT’s means that the buying and
selling of them is – to a degree – conducted with very little supervision from the authorities.
While states and individuals may have had sanctions imposed on them to prevent them trading

5. with others, the lack of legislation relating to NFT’s may enable those subject to sanctions to
trade without being detected by enforcement agencies. As with money laundering, NFT’s do
create an opportunity for those looking to act illegally without attracting official attention.
Smart Contract Risks and Maintenance of NFTs
The risk of smart contracts and NFT maintenance is a prominent one currently prevailing in the
NFT market. There are several scenarios where hackers attack a DeFi (Decentralized Finance)
network and steal a large amount of crypto. Recently, the most-renowned DeFi protocol named
Poly Network was attacked by hackers, and $600 million was stolen in this NFT theft. The
reason behind that theft was because smart contract security wasn’t adequate. The hackers
successfully exploited the flaws of smart contracts to perform such a large-scale attack on the
Poly Network. The Poly network is very useful for swapping tokens on different blockchain
networks. This tells us that if smart contracts have even a tiny flaw, you cannot expect
completeness.
Conclusion
Before you jump into anything just because of the hype, it is necessary to perform thorough
research. When it comes to non-fungible tokens, it is much better if you understand all the risks
and challenges first. This will even make it easy for you to buy and sell NFTs in the market by
eliminating the risks. When an individual invests in an NFT, they may be looking at a fake or a
copy of an artwork from a seller disguised as the legitimate owner or an artist. In reality, the
artwork could be from an unverified seller duping investors into paying for an NFT that they
might not have rights to access or sell.