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With NFTs, You Need Locks for Your Keys

Written by Jason Williams
Posted April 16, 2021

Call me tardy to the party, because I’m just writing about a relatively new investment that’s been making headlines for the past few months.

I’m talking about NFTs, or non-fungible tokens. They’re pieces of digital “artwork.” But they run the gamut from actual artwork to videos of NBA players dunking on competitors.

To give a physical comparison, it’s like the difference between buying a print of a famous painting and buying the painting itself.

If you like the art, you might buy the print to display in your house, but if you’re in it for the potential appreciation, you might buy the original and stick it in a safe so it doesn’t deteriorate.

But with digital “art,” you can own it and display it without worrying about the sunlight bleaching the paint or the moisture in the air destroying the canvas.

It’s not really the art you’re buying, though. It’s the ownership of that original creation.

Another example from the physical world is the fancy license plates I used to see on the rich kids’ cars when I went to a private high school in New Castle, Delaware.

You see, Delaware has a few kinds of plates for your car. One of them is a black ceramic plate with white letters and numbers. With it, you also get a stainless-steel version to put on your car.

But there are a limited number of them because they’re reserved for low-digit tag numbers.

And because there’s a limited supply and a practically limitless demand, people bid thousands of dollars for them. In fact, a few years ago, one sold for around $675,000.

It was part of an estate and sold for more than the house that was left to the family. The license plate number was 6.

But it’s not really the tag you’re paying for. I can make you a ceramic plate that looks identical (I can even make you one with a lower number). But that tag would be illegal to put on your car and drive around with.

You’re really paying for the registration with the state that makes the tag an official license plate.

It’s similar to NFTs in that you’re not paying millions for the art itself — you’re paying for the privilege of owning the only official copy. You’re buying the Mona Lisa from the Louvre, not a print from the gift shop.

But with new forms of investment come new forms of scams and frauds and theft. And NFTs are no different.

Digital Pirates

Remember back when Bitcoin was going through its early bubbles? Prices were flying higher and higher.

And then everything came to a screeching halt as the largest crypto exchange of the time, Mt. Gox, got hacked and individuals using the platform had millions of dollars' worth of the cryptocurrency swiped from their accounts.

You see, Mt. Gox had rushed a product to market to capitalize on the crypto-trading boom. And in that rush, it hadn’t spent enough time focusing on security.

That’s a BIG problem with digital anything. Because of its nature, it’s nearly impossible to track once it’s left a centralized platform.

And that’s the whole idea behind digital assets — they’re decentralized.

But because of that decentralization (and Mt. Gox’s lack of care for proper security), that company, or what remains of it, is still working out a settlement with the victims. And it’s still trying to track down the coins that got swiped.

Well, the same thing recently happened with one of the biggest, most trusted NFT exchanges. And it happened for the same reason. And it’s probably going to be just as hard to recover the stolen assets.

Possession Is 9/10ths of the Law Digital Assets

You’re probably familiar with the expression that possession is nine-tenths of the law. But did you know that applies to digital assets too? In fact, it’s more like 100% of digital assets.

You see, since these things are decentralized, the only way to establish ownership is to actually have one in your custody. But it’s kind of hard to take a string of ones and zeros and put it in your safe.

So these digital assets need digital safes. But the problem with a safe, any kind of safe, is that if you have the combination, you can take everything out of it.

That’s why I say possession is 100% of digital assets. Once you possess the combination to the lock, or the key, you pretty much own whatever assets that lock and key were protecting.

And it’s really hard to track you or those assets down once you transfer them out of the centralized platform and into the ether.

One of the largest NFT exchanges in the world, Nifty Gateway, was recently hacked and thousands of users had their NFTs stolen. Some even had their credit cards used to buy more NFTs before those were also transferred out of the accounts.

The digital pirates that orchestrated this raid on the platform were able to do it, according to Nifty, because the customer accounts they hit didn’t have two-factor authentication (2FA).

You’re probably familiar with some form of 2FA. I use it on my bank accounts and credit cards (my brokerage accounts, too).

It’s when you put in your username and password but then have to submit a second form of proof you’re really you. This typically comes in the form of a string of numbers sent to your linked phone number or email address.

You put in the code you get in the text or email and you’re off to the races.

But if you don’t have that set up on your accounts — and it’s not mandatory for many — all a potential thief needs is your login name and your password to pretend to be you and heist all your tokens.

And that, again, according to Nifty, is why some of those customers lost hundreds of thousands of dollars in digital art (and some had their credit cards used to buy digital art for the scammers).

The company had this to say as it washed its hands of any responsibility:

“Our analysis is ongoing, but our initial assessment indicates that the impact was limited, none of the impacted accounts had 2FA enabled, and access was obtained via valid account credentials.”

Hmmm. Sounds like the company is shaming those users for not taking the extra step to secure their accounts with 2FA. But security shouldn’t fall just on the customer. The company needs to take some responsibility too.

Sounds like it’s saying you need to lock up your digital assets and then you also need to lock up the keys to those locks.

A Potentially Profitable Future

Now, I’m not telling you all this to scare you away from digital artwork and NFTs. I’m not ready to call this market ephemeral. The bubble in it may be, but Bitcoin’s seen bubbles before.

And Bitcoin is currently trading well above the tops of all those previous bubbles.

I avoided Bitcoin when I first discovered it because I couldn’t grasp the concept of a currency you couldn’t actually use to buy things. It was trading for between $5 and $50 a coin back then.

And I’m not going to miss out on this revolution in digital investments. But I am going to caution you.

Lots of crypto exchanges suffered the same fate as Mt. Gox. Newly public Coinbase did not because it’s No. 1 focus was security.

But Coinbase was far from the first crypto exchange. Most of those fizzled out after hackers broke their minimal security setup.

That’s likely to happen with a lot of NFT portals or exchanges. So if you’re thinking about wading into this new market, do it with caution.

And make sure you’re storing your tokens somewhere people can’t easily access them. That means they can’t be connected to the internet.

And before you go off thinking you need a new USB drive for your digital assets, those need to live in what’s known as a hardware wallet.

Hardware wallets differ from USB drives in one major way — and it’s the way that they protect your assets and the keys you need to access them.

According to MyCrypto on Medium, “A USB drive can only act as storage for your keys and leaves you open to attack whenever you access it. A hardware wallet has your private key within it, never exposes that key, and requires physical confirmation to send a transaction.”

You don’t just need a lock for your assets. You need a lock for your keys too.

So before you go diving in headfirst, take a little time to learn how to secure your investments before you start making them.

It might be a little inconvenient to learn a new thing, but it’s nowhere near as inconvenient as opening your account and seeing your life savings turned into no savings by a hacker.

Coming Soon

And keep an eye out here. Myself and my fellow analysts here at Wealth Daily (and across our parent company, Angel Publishing) are all researching the new marketplace.

We’re throwing our combined brainpower and centuries of experience together to uncover the best, easiest, and safest investments you can make in the NFT and digital asset space.

And we’ll be revealing them here and in the pages of our sister site, Energy and Capital, in just a few short weeks.

So keep an eye out for our emails about this new corner of the market. The way it’s moving (and the way digital currencies like Bitcoin have made investors fast fortunes), you won’t want to miss a beat.

And you’ll need to act fast. But you’ll have the combined experience of our whole team helping you make the best potential investments for the biggest potential profits.

To your wealth,

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Jason Williams

follow basic@TheReal_JayDubs

After graduating Cum Laude in finance and economics, Jason designed and analyzed complex projects for the U.S. Army. He made the jump to the private sector as an investment banking analyst at Morgan Stanley, where he eventually led his own team responsible for billions of dollars in daily trading. Jason left Wall Street to found his own investment office and now shares the strategies he used and the network he built with you. Jason is the founder of Main Street Ventures, a pre-IPO investment newsletter, and co-authors The Wealth Advisory income stock newsletter. He also contributes regularly to Wealth Daily. To learn more about Jason, click here.

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