In 2021, the NFT market experienced a surge in opportunities. Statistica data indicates a remarkable increase in collectable art sales, soaring from approximately $20 million in 2020 to $2.57 billion. This unprecedented growth created widespread discussion and enthusiasm across various communities, leading to substantial investments in digital art. The market’s rapid growth spurred investors into committing millions of dollars in exchange for digital art pieces, significantly impacting the financial landscapes of creators and early adopters. Notable transactions included Larva Labs’ Cryptopunk collection selling for $23.7 million in February, former Twitter CEO Jack Dorsey auctioning a tweet as an NFT for $2.9 million in March 2021, and a single Bored Ape Yacht Club NFT fetching $3.4 million at a Sotheby’s Metaverse marketplace auction in October 2021.
Despite initial profitability, the NFT market swiftly experienced a downturn. Bloomberg reported a staggering 97% decline in NFT trading volume from its peak in January 2022 resulting in varied outcomes for investors. For instance, the individual who purchased Jack Dorsey’s tweet for $2.9 million encountered challenges in reselling the NFT, he received the highest offer of $6,200, equating to a mere 0.2% of the initial investment. Similarly, YouTuber-turned-boxer Logan Paul revealed a plummet in the value of his $623,000 NFT to $10, although there was a debate regarding the accuracy of this valuation, given that the estimated value of the NFT was presumed to be higher.
Logan Paul paid $623,000 for this NFT that's now worth $10 ……
Draw your own conclusions … pic.twitter.com/VCbLVRwpt0
— Wall Street Silver (@WallStreetSilv) September 28, 2022
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 of the NFT market, contrasting opinions emerged about this new blockchain innovation. Various controversial claims proliferated across the internet, spreading Fear, Uncertainty, and Doubt (FUD) surrounding the advancements in Web3 technology. The speculative nature of these claims failed to accurately predict the duration of the perceived bubble.
Rather than engaging in understanding and adopting NFTs, many individuals sought rapid financial gain before an anticipated market downturn. The prevailing sentiment centred on capitalising on the trend, foreseeing a realisation that the sales were driven more by the trend’s momentum than the intrinsic utility of the art itself.
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Absence of Community Strength and Long-term Vision
Prominent projects within ecosystems, such as Bored Ape on the Ethereum blockchain and Degods on Solana, demonstrated innovation by emphasising value creation and establishing a communal ethos for their investors. In the NFT world, the realisation of gains on investments hinges upon finding another buyer willing to purchase at the perceived valuation. Community dynamics wield substantial influence over the success of NFTs, fostering a sense of belonging among members, nurturing strong relationships, and amplifying the perceived value of the artwork. Rather than merely assuming the role of investors, communities serve as fertile grounds for members to flourish and contribute value.
As of May 2022, the NFT landscape was brimming with myriad projects, yet founders grappled with the challenge of cultivating sustainable communities. Instead of prioritising substantive project development, individuals sought entry into communities primarily for whitelist privileges. The market sentiment resulted in several faltering communities and as a result, there was a rush among investors to secure profits, subsequently leading to a steep decline in floor prices.
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Predominance of Flippers (Speculators) Over Art Collectors (Long-term Investors)
Initially, early adopters of NFTs exhibited staunch confidence in the communities they invested in, leading to the sale of their assets at exorbitant prices. However, this trend witnessed a rapid reversal within a few months. NFT investors shifted focus from seeking projects with potential for long-term generational wealth creation to pursuing projects promising quick, albeit modest, returns (e.g., 2X gains) without the intent of holding onto the art for extended periods. Unlike dedicated art collectors who ascribe immeasurable value to the artworks they acquire, speculators in the NFT space prioritise swift profits. Consequently, this shift in mindset gradually instigated a culture of undercutting within marketplaces, resulting in downward pressure on NFT prices.
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RugPulls
The elevated incidence of scams within the NFT market has significantly contributed to the ongoing crisis. According to the Elliptic financial crime report, fraudulent activities related to NFTs amounted to approximately $100.6 million between July 2021 and July 2022. Notably, in the recent past, Aptos Chimp, an NFT operating on the Aptos blockchain, defrauded investors of 1.5 APT, equivalent to approximately $12.6 million, employing a counterfeit site drainage scheme. Concurrently, a surge in imitative projects emerged, and later, project founders prematurely offloaded their projects post-minting, eliciting suspicion and eroding trust within their communities. Certain fraudulent entities masqueraded as legitimate project founders and were continuously initiating new projects. For instance, following the initial scam where Ballonsville founders deceived investors of $5,000 SOL, valued at $600,000 at the time, they launched a subsequent project named Reptilian Renegade. However, upon the revelation of the team’s identity behind this new venture, the floor price precipitously declined, instigating panic within the NFT market.
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Crypto Market Crash
Cryptocurrency is a powerful store of value, even in Web 3. In June, the Bitcoin price dropped by nearly 37% after plunging from $32000 to under $18000. In June 2022, Bitcoin encountered a substantial decline of nearly 37%, plummeting from $32,000 to below $18,000. This downturn reverberated across NFT majors and gaming tokens, resulting in a dip that affected not only the floor prices of NFTs but also caused losses due to the diminished cryptocurrency valuation of these investments. Given the substantial overlap between NFT and cryptocurrency investors, many individuals were compelled to sell their collectibles at a loss to recuperate from the adverse impact of the crypto market downturn.
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Utility Collapse
The NFT ecosystem encountered challenges in sustaining the utility features associated with its artworks. Numerous projects were launched with the promise of enabling holders to earn tokens through staking mechanisms, with token rewards intricately linked to the rarity of their corresponding NFTs. Consequently, when certain investors realised that their NFTs held common attributes, they initiated sales at significantly reduced prices, triggering a decline in the floor price and resulting in losses for other investors. Furthermore, some communities devalued their NFTs by initiating airdrops of tokens as rewards for NFT holders, precipitating a collapse in NFT prices following the token redemption by their respective owners.
The NFT market continues to grapple with the aftermath of the crash, leaving investors in a state of uncertainty. So, the question arises: can NFTs regain momentum, or have they met their demise? However, with strategic restructuring, NFTs have the potential to rise again.
Here are the foremost methods to resuscitate the NFT market:
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Reassessing Asset Valuation Metrics
The valuation of NFTs ought to transcend mere floor value considerations, emphasising critical elements such as community engagement and functional utility. This strategic shift aims to cultivate a perception among holders that their NFT holdings are regarded more as substantive assets than mere tradable collectibles.
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Community Development
NFT communities must prioritise the cultivation of authentic, organically grown communities that are steadfast in their belief and commitment to the project’s future. Projects should emphasise fostering genuine and committed communities rather than hastily amassing a vast audience solely interested in profit and self-interest. This approach aims to attract more long-term investors who are invested in the project’s success than short-term flippers (traders) seeking immediate gains.
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Advancing Innovation in NFTs
Creators ought to pioneer novel concepts and substantive utilities capable of enhancing the intrinsic value of NFTs. The developmental roadmap should encompass a spectrum of digital and tangible utilities that negate the need for speculative activities like pump-and-dump schemes following staking and airdrop activities.
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Web3 Gaming
Innovative and user-friendly GameFi applications have the potential to reignite momentum within the NFT space. High-quality gaming projects can incentivize users to acquire NFTs, which serve as digital access keys to the Web3 gaming ecosystem. Moreover, this approach can contribute to enhancing Web3 adoption by introducing newcomers to the captivating world of blockchain technology.
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Metaverse Growth and Adoption
NFTs, as decentralised digital assets, and the Metaverse, acting as a conduit bridging investors and businesses to a dynamic virtual realm, mutually contribute to expanding their respective technologies.
However, the metaverse which was once hailed as a rapid technology, has encountered a struggle to gain traction, contributing significantly to the decline observed in NFTs. Notably, many valuable NFTs incorporated Metaverse functionalities, and the deceleration of NFTs was notably impacted when major corporations like Google, Meta, and others diverted attention away from the Metaverse towards other disruptive innovations such as AI (Artificial Intelligence).
Despite the metaverse grappling with setbacks stemming from impractical expectations, regulatory complexities, and technical obstacles, the technology possesses the potential for a resurgence. Continued iterations, the development of innovative products, and the establishment of sustainable business models by innovators could potentially revitalise the metaverse. This resurgence would unlock fresh opportunities for Web 3 users to participate in the creation and investment of metaverse-linked NFTs.
Conclusion
NFTs, like cryptocurrency, have made several millionaires during the bull market cycle. However, investors experienced short-term profitability before the hype and market scalability began to decline. Although the NFT market has been stagnant for over a year, it is likely to experience a promising turnaround following the creators’ product and community restructuring, Web3 gaming and Metaverse adoption.