The DraftKings NFT saga should serve as a clear warning that the Wild West of digital assets has plenty of remaining bite as well. The $10 million settlement is a drop in the bucket. Everyday investors who got caught up in the hype suffered much more devastating losses. This isn’t simply a cautionary tale on sports collectibles, but rather financial peril and the future of investing. So, here are the lessons YOU need to learn as we programmatically turn our attention away from COVID-19.

NFTs Aren't Always What They Seem

This isn't your grandma's baseball card collection. The DraftKings case, centered around their Reignmakers NFTs, hinged on a crucial question: are these NFTs actually unregistered securities? The lawsuit’s claim, upheld by the judge, was that they may be considered investment contracts under the Howey Test.

Putting it in layperson’s terms, this regulatory structure is used to determine if a transaction meets the definition of an investment contract. “If it does so, then it’s subject to securities laws. It boils down to this:

  • Is there an investment of money?
  • Is there an expectation of profits?
  • Is the investment in a common enterprise?
  • Do profits come primarily from the efforts of others?

If you answered yes to those questions, you’re likely dealing with a security concern. After all, securities are regulated for a reason! The DraftKings NFTs, pegged to the value of fantasy sports contests and corresponding chances to win, stumbled on this criteria.

Think of it like this: you wouldn't buy stock in a company without knowing anything about its financials, right? A vast majority of users flocked to NFTs without considering the technological framework or legal context. This is where the danger lies.

Liquidity: The Silent Killer of Value

In August, DraftKings abruptly closed their DK Marketplace, leaving users stuck with NFTs that are now, for most, virtually worthless. This is the harsh, stark truth of illiquidity. The previous value of the NFT isn’t relevant, let alone the exorbitant amount paid recently. That’s true even if you anticipated it would be useful down the road. Because if you can’t sell it, then it’s just a digital paperweight.

This is one lesson that resonates well beyond the NFT universe. Illiquidity is a risk that afflicts every investment under the sun, including real estate investments and some private equity investments. It’s even more severe in the highly unpredictable space of digital assets. The danger is that the hype might evaporate just as quickly as it materialized, leaving you holding the bag.

Maybe you recall those Beanie Babies people were convinced would make them millionaires. Yeah, me neither. The same principles apply here. First, avoid making an investment you can’t readily back out of.

Due Diligence Is Your Only Shield

While the DraftKings settlement is a victory for consumers, it doesn’t erase the financial harm that many have experienced. The settlement distribution is incredibly welcome news. It will be divided among maybe more than 175,000 investors and remember that legal expenses and administrative costs will eat into any eventual payout. Lead plaintiff Justin Dufoe would get just a $50,000 service award, a mere pittance compared to the hundreds of millions in collective losses.

The biggest takeaway from all of this though is that you are your own best advocate. Nobody else is going to mind your money more than you will. With that in mind, what should due diligence entail in the NFT space?

  • Understand the Project: What problem does it solve? What's the roadmap? Who's behind it? Dig deep.
  • Assess the Community: Is there genuine engagement, or is it just hype? Are there red flags like bot activity or artificially inflated prices?
  • Scrutinize the Legal Framework: Does the project make any claims that sound like a promise of profits? Could it be construed as a security?
  • Diversify, Diversify, Diversify: Don't put all your eggs in one digital basket. NFTs should only be a small part of a well-diversified investment portfolio.
  • Consider the NFLPA Settlement: DraftKings had to settle separately with the NFLPA regarding the use of player likenesses. This highlights the importance of intellectual property rights and potential legal challenges surrounding NFTs.

Imagine it as purchasing a pre-owned car. You wouldn’t buy a car without opening up the hood and kicking the tires, would you? The same goes for NFTs.

The DraftKings NFT catastrophe is a lesson to us all. It drives home the dangers associated with investing in unregulated digital assets and the need to not get caught with your pants down. Don’t allow the fear of missing out (Fomo) to drive you into the poor and lonely house. What’s the difference between innovation and bubble? The next big thing might equally be the next big bust. Protect yourself, educate yourself, and invest wisely. Your financial future depends on it.

The DraftKings NFT debacle is a wake-up call. It highlights the risks of investing in unregulated digital assets and the importance of doing your homework. Don’t let the fear of missing out (FOMO) cloud your judgment. The next big thing could just as easily be the next big bust. Protect yourself, educate yourself, and invest wisely. Your financial future depends on it.