Why Did The NFT Market Collapse?

September 8, 2022

Consumer confidence in non-fungible tokens (NFTs) as investment products has been waning recently. The number of NFT market participants has steadily declined since February 2022.

Across all decentralized finance categories, NFTs have seen the largest average weekly drop in transaction volumes following the cryptocurrency collapse from May 2022 to July 2022. 

The NFT market was down 92% from September 2021 to July 2022. In November 2021, active users of NFTs were at 119,000; in June 2022, the users were as low as 14,000.

About the Current NFT Market Collapse

On June 13th, 2022, a market crash was seen in the floor prices of the NFT marketplace. The floor price for Bored Ape Yacht Club (BAYC) and CryptoPunks fell to 74 ETH and 48 ETH respectively. Historically, these collections have been the most successful of all time.

Consumer confidence in the NFT market has been waning following the 2022 cryptocurrency winter. The number of NFT market participants has steadily declined since February 2022. But in June, that decline accelerated with an 88% drop in the number of addresses transacting on NFT marketplaces in a given week, according to blockchain analytics platform Chainalysis.

The average price of an NFT sale has also decreased rapidly, by 92% since the beginning of May 2022, falling from $3,894 to $293, according to Chainalysis’s July 2022 data. 

Crypto and NFTs are closely linked, both in practice and in the eyes of most investors. With the overall prices of crypto down nearly 24%, some of the best-performing NFT projects have also seen a rapid decline in their floor prices.

Several blue-chip NFTs, including Bored Ape Yacht Club, saw their prices slashed by almost half in August 2022.

NFT Market Rise

NFTs originated with the introduction of blockchain technology, the same tech that powers cryptocurrencies like Bitcoin and Ethereum.

Blockchain, in simple terms, refers to technology that allows users to store a list of records, all connected through cryptography — a method of keeping information secure by transforming the information through an algorithm. The end result is the entire list is verifiable from start to finish and can’t be modified without the consent of all participants, or sometimes can’t be modified at all.

NFTs first blew up in the art world as a means to provide verifiable ownership, or rights, to digital artwork. This idea quickly attracted a lot of attention. Celebrities began to purchase or create their own, popular brands entered the NFT space, and the use cases for NFTs expanded.

Transactions began rising in value rapidly. A LeBron James collectible card sold for $230k and Jack Dorsey’s first tweet sold for $2.9 million.

What Are Factors Behind the NFT Market Collapse? 

While the crypto winter definitely played its part in the NFT market crash, Chainalysis economist Ethan McMahon has said the crash is too steep to be explained by this alone. Many factors have contributed to the NFT crash including the overvaluation due to hype, market factors, and regulatory concerns. 

Inflated NFT Market

McMahon emphasizes that an inflated market was also partly responsible for the decline in NFT transaction volume. Over the past year, the NFT market gained a lot of hype. Collections such as the Bored Ape Yacht Club sold NFTs for more than $2 million a piece, celebrities and luxury brands got into the market, and digital artist Beeple sold a single NFT for over $69 million at auction.

The hype pushed NFT prices skyward at an unsustainable rate. Like other markets driven by exuberance, impulse purchases, and hype, the fast-moving and speculative NFT market quickly burnt out and burned investors along the way. It’s possible this market crash is simply a market correction to make up for overvaluation from the past year. 

Crypto Volatility

In the most simple terms, crypto volatility seeped into the NFT market and reduced investor optimism. NFT market conditions have been largely correlated to and reliant upon the general crypto market. As digital assets soared in valuation, it became easier for investors to justify speculating on the NFT asset class.

As crypto prices began to plummet, NFT and other metaverse and blockchain companies felt the pain, with many of the biggest players announcing significant layoffs. In July, Blockchain.com announced layoffs of a quarter of its workforce, OpenSea announced a 20% cut of its staff, and Coinbase announced an 18% cut among others.

Cybersecurity Concerns

Another reason behind the NFT price downturn is investor skepticism over the safety of NFTs. According to an August 2022 study by blockchain analysis company Elliptic, over $100 million worth of NFTs had been stolen over the course of the past year. The study even found that the rate of cybercrimes may be increasing with the recent crypto crash.

Between the first and second quarters of 2022, the value of NFTs stolen through social-media scams went from $3.2 million to $15.4 million—a 386% rise. It checks out that investors may be wary of an asset class with such heavy levels of theft associated with it.

Economic Cycle

Other NFT experts have claimed the NFT crash is like any other economic cycle. Anjum Malik, co-founder of private crypto hedge fund Manhattan Crypto Capital, cited the cycle as similar to any other asset class that sees peaks and valleys. According to Malik, the current market environment will improve as new innovations emerge and more investors buy the dip.

Will NFTs Recover?  

If you read any cryptocurrency news, you’ve probably seen that NFT investors are still bullish on the product. McKinsey reported that the Metaverse will likely reach a valuation of $5 trillion by 2030, and a market report by Verified Market Research predicted the NFT market would reach $230 billion by 2030.

The challenges of scams and overvalued asset bubbles will continue to face companies in the NFT space. Still, these market reports claim that overcoming these hurdles will result in a healthier ecosystem of more stable projects that will go beyond digital art as Twitter avatars.

NFTs have uses far beyond digital art, including event tickets, personal records, domain names, and even supply chain tracking. While prices may be falling, NFTs are still gaining traction from large brands— including new announcements from Tiffany & Co and other luxury brands developing NFTs. It’s hard to imagine that NFTs will be gone for good following this collapse.

This material is provided for informational and educational purposes only.  It is not intended to be investment advice and should not be relied on to form the basis of an investment decision

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