After the global rout of cryptocurrencies, it seems to be the turn of digital tokens.
Launches of new Non-Fungible Tokens (NFTs) are being delayed and investments and trading volumes are slumping as buyers turn leery amid all the bad news in the global markets.
NFTs are digital assets that represent real objects like art, music and sports. They are bought and sold online like normal assets, but each is distinguished by a unique code that is recorded on blockchain, a digital ledger. This code helps in tracing back an NFT to its owner.
Lifted by the hype around NFTs, the market for digital tokens hit a peak of $23 billion last year; it has now dropped by almost half to $12 billion, according to CoinMarketCap, a price tracking website for crypto assets.
Of course, last year saw the sale of Everydays: the First 5000 Days, a digital work of art created by Mike Winkelmann, known as Beeple, for $69.3 million at an auction by Christie’s, making it the most expensive NFT.
Other big sellers include the Bored Ape Yacht Club, a collection of 10,000 unique NFTs, and CryptoPunk, a set of 10,000 unique art images depicting humans, zombies apes and aliens.
More noise, less value?
Experts say the downturn had become inevitable, and just like across financial markets, cryptocurrencies and the start-up world, the froth in the NFT marketplace too was bound to clear.
Unlike the crypto market, which may take anywhere between 12 and 24 months for revival, this is the first time NFTs are facing such a slump so it’s more difficult to predict, the experts said.
“What we are seeing in the NFT marketplace is inevitable. There was a lot more noise in the NFT space than value,” said Vaibhav Domkundwar, CEO and founder of Better Capital, an early-stage venture capital firm.
“That does not mean that NFT as a segment is fundamentally suffering from a problem. It is just that the noise is going away because while several projects were doing great, there were also a lot of not-so-great ones,” he said.
Transaction volumes in the NFT marketplace are down, too, in line with the crypto market.
“NFTs and crypto markets are connected because they ultimately rely on the fundamental technology of blockchain,” said Toshendra Sharma, founder and CEO of NFTICALLY, a group of blockchain developers.
Sea change
The situation has changed a lot in a short span of a month-and-a-half.
"A while ago, many were launching their NFT collections unlike now when liquidity is tight," said Sharma.
According to a person familiar with the situation who didn’t want to be identified, Indian NFT trading platforms such as WazirX have seen a significant drop in numbers too.
“WazirX NFT has seen a drop in the number of users. Plus due to lack of clarity on regulations the situation was anyway bad for Indian NFT marketplaces,” the person said.
According to DappRadar, an app store for decentralized applications, for nine WazirX NFT smart contracts, the platform had 358 users and saw transactions worth $43,000 across 12,000 transactions at its peak on February 1, 2022.
On June 2, the number of transactions on the marketplace had fallen to just 660. These transactions were worth only $879 and just 110 users were on the platform.
“People are not buying collections which are not known, but rather which are known, even though the volume is low. But the prices of the collections which are not very famous or have just launched are going significantly down. So this is also not a good time to launch a project,” said Sameer Malik, Lead, NFT Council, Blockchained India, which describes itself as a community of blockchain enthusiasts.
Buyers have transitioned to looking for either cheaper NFTs or investing in ones that have better utility or purpose. With the hype having died down, companies too are focusing more on innovation and use cases, according to NFTICALLY’s Sharma.
“In the Indian market, utility-based NFTs like cricket, Bollywood, or some other engagement-related NFTs will pick up. That is happening even though the market is correcting,” he said.
“Enterprises are still showing interest in this technology, and trying to understand if they can use it for the engagement in their business -- that part is still on.”
Chill from the funding winter
Despite a marked slowdown in start-up funding, globally investors are committing to Web3 and blockchain investments. On June 1, Binance Labs announced the close of a $500 million fund to invest in these technologies.
Additionally, American venture capital firm Andreessen Horowitz announced a $4.5 billion Web3 fund on May 25.
That said, the impact of the overall change in the funding environment is likely to extend to these spaces as well and utility, unit economics and lowering cash burn will remain important
Domkundwar, whose venture capital firm has invested in 20 crypto, blockchain and Web3 related startups including Vauld, Mudrex, Sahicoin and Builders Tribe, said: “The pace at which rounds were moving and the price will definitely get affected with the broader market sentiment and the crash.”
But he believes that investors will continue backing these technologies as they are still at a nascent stage and those who believe in the cause understand that startups will require support, more so through such downcycles.
“Many investors are not investing in Web3 opportunistically. If we truly believe that a decentralised future is inevitable, we will have to continue investing. As far as Better Capital is concerned, we will continue to invest as before. The pace will slow down a bit but it doesn't change our stance on Web 3 investments,” Domkundwar added.
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