In 2021, the NFT market experienced a remarkable surge, with collectable art sales skyrocketing from approximately $20 million in 2020 to $2.57 billion. This unprecedented growth generated widespread enthusiasm, prompting substantial investments in digital art. The market’s rapid growth prompted investors to commit exorbitant amounts on art pieces, which significantly impacted creators and early adopters. Notable transactions included Larva Labs’ Cryptopunk collection, which sold for $23.7 million, and in February, former Twitter CEO Jack Dorsey auctioned a tweet as an NFT for $2.9 million. Additionally, in March, a single Bored Ape Yacht Club NFT sold for $3.4 million at a Sotheby’s Metaverse auction in October 2021.
Despite initial profitability, the NFT market quickly witnessed a downturn. Bloomberg reported a staggering 97% decline in NFT trading volume from its peak in January 2022, resulting in mixed outcomes for investors. For example, the person who purchased Jack Dorsey’s tweet for $2.9 million struggled to resell the NFT, receiving the highest offer of only $6,200, which is just 0.2% of the original investment. Similarly, YouTuber-turned-boxer Logan Paul disclosed a dramatic drop in the value of his $623,000 NFT to $10. However, there were debates about the accuracy of this valuation, as the estimated worth of the NFT was thought to be higher.
The NFT market has been struggling to gain momentum since May 2022, but what exactly happened? Are NFTs dead? Here are six reasons the NFT market went down:
Poor Intrinsic Value
During the 2021 surge in the NFT market, controversial claims spread across the internet, fostering Fear, Uncertainty, and Doubt (FUD). These speculative assertions contributed to the short lifespan of the perceived bubble.
Rather than focusing on understanding and adopting NFTs, many individuals sought quick financial gains. The sentiment was to capitalize on the trend because sales were more driven by the trend’s excitement than the actual value of the art itself.
Absence of Community Strength and Long-term Vision
Community is a core force in Web3. It not only creates a sense of belonging but also strengthens relationships and amplifies projects’ perceived value.
Although prominent projects like Bored Ape and Degods created a strong communal ethos among their investors, in May 2022, several NFT projects struggled to cultivate sustainable communities. Several traders and investors joined communities mainly for whitelisting purposes rather than long-term growth. This trend resulted in several failed communities with investors scrambling to secure profits.
Predominance of Flippers (Speculators) Over Art Collectors (Long-term Investors)
Initially, early NFT adopters were highly confident in their investments and sold their assets at higher prices. However, this trend quickly reversed within a few months. Investors began to shift focus from finding long-term projects to those promising quick and modest returns. Unlike dedicated art collectors who placed a high value on their art, NFT speculators were aiming for quick profits. This mindset change gradually created a marketplace undercutting culture, leading to a decline in NFT prices.
RugPulls
The high incidence of scams has significantly contributed to the ongoing crisis in the NFT market. According to the Elliptic financial crime report, fraudulent activities related to NFTs amounted to approximately $100.6 million between July 2021 and July 2022. A notable example is the Aptos Chimp NFT, which operated on the Aptos blockchain and defrauded investors of 1.5 APT, equivalent to about $12.6 million, using a counterfeit site scheme.
At the same time, there were numerous NFT imitation projects. Many founders abandoned their projects shortly after minting, eroding trust and suspicion within their communities. Some founders also deceived their investors through anonymity and pretence. For example, Ballonsville founders who defrauded their community of $5,000 SOL, valued approximately at $600,000 at the time, proceeded to launch a new project called Reptilian Renegade. When the true identity of the team behind this new venture was exposed, the floor price of the NFT plummeted, triggering panic and further destabilizing the market.
Crypto Market Crash
Cryptocurrency continues to be an important store of value in Web3. In June 2022, Bitcoin’s price plummeted nearly 37%, falling from $32,000 to under $18,000. This sharp decline had a ripple effect on the NFT market, reducing their floor prices on secondary marketplaces and diminishing the value of related investments. As a result, many NFT and crypto investors, facing these losses, were forced to sell their collectibles at a loss to mitigate the impact of their declining crypto assets.
Utility Collapse
NFTs struggled to sustain art utility. Initially, many projects promised token rewards to holders, depending on art rarity. However, when investors realized that their NFTs were more common than expected, they liquidated their assets at ridiculously low prices. This triggered a decline in floor prices, resulting in losses. Additionally, some communities further devalued their NFTs by issuing token airdrops as rewards. Once the tokens were redeemed, the NFTs would lose their market value.
As the current NFT market struggles with growth, investors battle uncertainty. The key question is whether NFTs can recover or if their era has ended. Despite these challenges, NFTs can regain momentum with a few restructuring measures.
Here are the foremost strategies to revive the NFT market:
Reassessing Asset Valuation Metrics
NFT valuation should extend beyond mere floor value to emphasize core elements such as community engagement and functional utility. This shift aims to help holders view their NFTs as valuable assets rather than just tradable collectibles.
Community Development
Creators should focus on building authentic and organic communities that are future-driven. They should prioritize building and fostering genuine and dedicated communities. This approach aims to attract long-term investors who are invested in the project’s future, rather than short-term traders seeking immediate gains.
Advancing Innovation in NFTs
Creators should develop concepts or provide a utility that increases the intrinsic value of NFTs. Roadmaps should include a range of digital and tangible benefits, minimizing the reliance on speculative activities such as pump-and-dump schemes often associated with airdrops.
Web3 Gaming
Innovative and user-friendly GameFi applications have the potential to reignite momentum in the NFT space. High-quality gaming projects may encourage users to acquire NFTs, which fundamentally act as digital keys to the Web3 gaming ecosystem. This approach would not only incentivize engagement but also onboard new users and increase Web3 adoption.
Metaverse Growth and Adoption
NFTs, as decentralized digital assets, and the Metaverse, which connects investors and businesses to a virtual world, are both important in the NFT resurgence.
However, the Metaverse has struggled to grow. Initially, several NFT projects incorporated Metaverse functionalities, but struggled when major corporations like Google and Meta shifted their focus from the Metaverse to other disruptive innovations, such as AI (Artificial Intelligence).
Despite facing setbacks due to unrealistic expectations, regulatory challenges, and technical difficulties, the Metaverse still holds the potential for a comeback. Continued development, innovative product creation, and the establishment of sustainable business models could revitalize the Metaverse and spur investors’ interest in metaverse NFTs.
Conclusion
NFTs, like cryptocurrencies, created several millionaires during the bull market. Although the market has been stagnant for over a year, there is hope for a turnaround. This revival could be potentially driven by community development, Web3 gaming, the Metaverse, and strong utility.
Disclaimer!: This content is solely for educational purposes and should not be considered financial advice.