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 expansion prompted investors to committing millions exorbitant amounts on art pieces which significantly impacted the financial landscape for 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 auctioning 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 a 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 was some debate about the accuracy of this valuation, as the estimated worth of the NFT was thought 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 in the NFT market, divergent opinions emerged concerning the new blockchain innovation. Controversial claims spread across the internet, fostering Fear, Uncertainty, and Doubt (FUD). These speculative assertions failed to accurately predict the lifespan of the perceived bubble.
Rather than focusing on understanding and adopting NFTs, many individuals sought quick financial gains, anticipating a market downturn. The prevailing sentiment was to capitalize on the trend, with many realizing that sales were driven more by the excitement and momentum of the trend than by the actual value of the art itself.
Absence of Community Strength and Long-term Vision
Community is a crucial force in Web3. It does not only create a sense of belonging but also enhance relationships and amplify the perceived value of project. Rather than simply being investors, community members actively contribute to the project’s growth and value.
Although prominent projects within ecosystems like Bored Ape and Degods fostered 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 longterm growth. This trend resulted to 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 as a result, often selling their assets at higher prices. However, this trend reversed quickly within a few months. Investors began shifting their focus from finding projects with long-term potential to those promising quick and modest returns. Unlike dedicated art collectors who attached immense value to their acquisitions, NFT speculators were aiming rapid profits. This change in mindset gradually fostered a culture of undercutting in marketplaces, 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, the market witnessed a surge in 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 a significant store of value in the Web 3.0 space. 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 the floor prices of NFTs 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 the falling cryptocurrency values.
Utility Collapse
The NFT ecosystem has struggled to maintain the utility of its artworks. Initially, many projects promised holders the opportunity to earn tokens through staking mechanisms, with rewards linked to the rarity of their NFTs. When investors realized that their NFTs were more common than expected, they liquidated their assets at significantly reduced prices. This triggered a decline in floor prices and resulted in losses for other investors. Additionally, some communities further devalued their NFTs by issuing token airdrops as rewards, leading to a decline in prices once the tokens were redeemed.
However, as the NFT market struggles with growth, investors face significant uncertainty. The key question is whether NFTs can recover or if their era has ended. Despite these challenges, strategic restructuring offers the potential for NFTs to rebound and regain their momentum.
Here are the foremost methods to revive the NFT market:
Reassessing Asset Valuation Metrics
NFT valuation should extend beyond mere floor value to emphasize critical elements such as community engagement and functional utility. This strategic shift aims to help holders view their NFTs as valuable assets rather than just tradable collectibles.
Community Development
NFT communities should focus on building authentic, organically grown groups that are committed to the project’s long-term success. Instead of quickly gathering a large audience driven by profit and self-interest, projects should prioritize fostering genuine, 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 lead in developing innovative concepts and meaningful utilities that enhance 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 staking and 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 foundationally act as digital keys to the Web3 gaming ecosystem. This approach would not only incentivizes engagement but also onboard new users and foster Web3 adoption.
Metaverse Growth and Adoption
NFTs, as decentralized digital assets, and the Metaverse, which connects investors and businesses to a virtual world, both play crucial roles in NFT resurgence.
However, the Metaverse has struggled to gain traction, significantly affecting the NFT market. Intilally, several NFT projects incoporated 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. However, investors experienced brief profitability before the excitement and market experienced a downturn. Although the NFT 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, Metaverse and strong utility.
Disclaimer!: This content is solely for educational purposes and should not be considered financial advice. Always conduct your own research before investing in any crypto or Web3-related solutions.