After wowing the crypto community for most of 2021, the market for non-fungible tokens (NFT) has slumped since the start of 2022. Valuations have plummeted from the highs of 2021, unnerving even the most ardent NFT fan.
Logan Paul, a US YouTuber and social media sensation, claimed that his Bumblebee-styled NFT called K4M-1 #03, acquired for $623,000 in 2021, was worth only $10 today. This is emblematic of the problem that NFT investors are confronted with – are NFTs a mere fad or is this a temporary blip?
With cryptocurrency prices tapering down since the last quarter of 2021, NFTs were also impacted, and the number of participants in marketplaces such as OpenSea fell dramatically.
The number of active NFT buyers and sellers in July 2022 (49.6K) has fallen below even January 2021 levels (59.9K), indicating a return to the pre-boom period, according to blockchain analytics platform Chainalysis. Comparing this with the high of January 2022 (960.7K) makes the situation even more alarming and reflects the waning investor sentiment around these digital assets.
Considering that only a few months ago, NFTs such as CryptoPunks #7804, Crossroads NFT, Hashmasks, and their like sold for millions of dollars, it can be surmised that lack of demand is the main reason for the collapse in NFT prices.
Even meme-based NFTs such as ‘Disaster Girl’, ‘Doge’, and ‘Bad Luck Brian’ that were sold for thousands of dollars aren’t being traded anymore.
NFTs are unique cryptographic tokens on a blockchain that cannot be replicated and they represent items such as artwork. Having overshadowed the cryptocurrency market with outlandish gains in 2021, NFTs have since buckled under the effect of falling cryptocurrency prices, mind-bending valuations, and a general lack of consumer demand.
Picture of consolidation
Fuelled by vocal interest from celebrities, marquee investors, and self-made crypto billionaires, NFTs racked up about $25 billion in sales in 2021 compared to the corresponding figure in 2019, which was a mere $94.9 million.
NFT sales came in at just over $1 billion in June 2022, according to Chainalysis, and have been declining since, mimicking the broader trend in the cryptocurrency market.
The average price of an NFT sale has fallen to $293 in July 2022 from $3,894 in May 2022, a drop of 92.5 percent in only two months.
On the other hand, NFTs such as the Bored Ape Yacht Club collection, comprising 10,000 uniquely minted collectibles representing Ape-like characters, have retained a high floor price of more than 75 Ether (ETH) even amid the current rout in the NFT market.
Ether is the token that facilitates operations on the Ethereum crypto network.
The resilience demonstrated by this collection and other popular NFTs like CryptoPunks supports the argument that NFTs are currently in a bear cycle, just as any other asset class.
NFT investors could take some solace in the fact that the NFT market is still above 2019 levels in terms of net sales and any rebound in cryptocurrency prices could bode well.
Experts said NFTs are merely going through a period of consolidation, with outlandish valuations being replaced by a more utility-based pricing formula.
With companies including Coca-Cola, Adidas, Samsung, and eBay jumping onto the NFT bandwagon, the market could mature from a speculative bubble to a consumer-focused merchandise space. Also, with companies like Meta building the Metaverse, NFTs will find increasing integration, more utility, and eventually, larger consumer interest.
As more nuanced consumers and institutional investors enter the NFT fray, a rejuvenation could take place in the NFT market, priming up for the next boom.
If the pricing behaviour of popular cryptocurrencies Bitcoin and Ethereum are applied to the NFT space, it can be surmised that the next boom cycle for NFTs will probably power these digital assets to a higher level than in 2021.
How much more pricing pressure there will be in the near future depends on factors including the global financial outlook, the war in Ukraine, and the duration of the current crypto winter.
For investors and NFT fans, though, this is arguably the toughest period, which will test their dedication, patience, and passion for what was the most prolific asset class by a long margin in 2021.
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