NFTs
Were NFTs a fad and are they worth investing in now?
From record sales in 2021 to a major market cooldown and reduced transaction values in 2023. What’s happening in the NFT market?
The world of non-fungible tokens (NFTs) has gone through dramatic ups and downs since it first appeared. NFTs started as an idea called “colored coins” in Bitcoin (Bitcoin) blockchain around 2012-2013. But the real breakout moment came with Ethereum (ETH) blockchain in 2017. Ethereum revolutionized the way NFTs were created, stored and traded, setting the stage for a new digital era.
So the year 2021 has been a game changer for NFTs, especially in the art world. Trading volumes on the NFT art market shot, reaching US$13 billion. The sale of Beeple’s digital art for a staggering $69 million was a highlight, marking a new era in digital art.
At the same time, projects such as CryptoPunks, CryptoKitties and Bored Ape Yacht Club have gained fame, shaping trends in digital art and collectibles. The term “NFT” has become so popular that Collins Dictionary named it the 2021 Word of the Year.
Despite this rise in popularity, recent trends suggest a cooling off in the NFT market. As we delve deeper into the latest data, we explore a crucial question: were NFTs just a passing trend or do they have a lasting impact?
The rise and decline of the NFT market
The NFT market, after experiencing a notable increase in popularity and value throughout 2021 and early 2022, has seen a significant slowdown starting in December 2023.
The decline became evident in late 2021 when NFT transaction volumes fell sharply. OpenSea, the largest NFT marketplace, reported an 89% reduction in business values between December 2021 and December 2022.
Even prominent auction houses like Sotheby’s have reduced their focus on NFTs despite some high-profile sales.
This downward trend persisted in 2023. In the first quarter, transactions totaled US$4.7 billion, an increase from US$1.9 billion in recent months – a sharp drop from the US$12.6 billion recorded in the same 2022 period.
Additionally, over 50% of NFT sales during Q3 2022 occurred at less than $200, signaling a considerable change from previous highs.
Despite these challenges, the NFT market has not been completely desolate. Some sales persisted, albeit at lower frequencies and values.
For example, Christie’s digital platform, Christie’s 3.0, successfully auctioned off a work of art for 50.1 ETH (about $93,000) in May 2023. Another noteworthy sale in June 2023 saw nearly $11 million exchanged for 40 digital artworks.
Dune Analytics data revealed an increase in trading volumes across major markets, reaching a four-month high in November 2023. Notably, Blur accounted for a substantial portion of these trades.
However, these numbers pale in comparison to the boom of early 2021, when the market was driven by strong FOMO (Fear of Missing Out) sentiment, with everyone eager to invest in NFTs for potential future gains.
NFT Trends and Highlights
According to a report As of August 2023, NFT ownership in the US is around 4%, a number that has doubled in a year. California was at the forefront of this trend. Despite this growth, a significant majority of the US population (70%) remains unfamiliar with NFTs.
In stark contrast, Southeast Asian countries such as the Philippines (32% ownership), Thailand (26.6%) and Malaysia (23.9%) have seen a substantial increase in NFT adoption, reflecting greater acceptance and understanding. widespread use of this technology in these regions.
The art segment of the NFT market, however, has seen variable sales. Between April 2021 and April 2023, the number of sales fluctuated significantly, with total sales in April 2023 being around 7,700, a drastic drop from the August 2021 peak.
Additionally, the NFT market recorded its first quarterly loss in Q3 2022, totaling more than $450 million. However, more than 12% of wealthy Asian consumers have made NFT purchases.
In this context, global interest in NFTs, as measured by Google search trends, has declined dramatically since its peak in January 2022. This declining interest is also evident in the falling base prices of major NFT collections.
For example, the Doodles collection saw its base price drop by 90% and its sales volume plummeted from $53 million in April 2022 to just $2.4 million in April 2023.
Similarly, Moonbirds experienced a 94% reduction in base prices, with a corresponding drop in sales volume from $484 million to $3.1 million over the same period.
On the positive side, the integration of NFTs into the gaming industry has been notable, with major companies like Ubisoft and GameStop adopting the play-to-earn model, especially in developing countries.
Additionally, NFT market dynamics show considerable differences in interest and adoption across income levels and generations. Millennials, for example, are three times more likely to engage with NFTs compared to Gen Z. In the US, 29% of adults have shown interest in investing in NFTs.
In Asia, especially in countries like China, Hong Kong and Singapore, there is greater online search interest in NFTs.
The Asia-Pacific region accounts for 43% of the global NFT market share, and the top five countries with the highest NFT adoption are also located in this region.
Reasons for the decline of the NFT market
The following reasons have collectively contributed to the decline in the NFT market:
Market oversaturation: The NFT market has experienced rapid expansion with a flood of new designs and collectibles. This led to a saturation of NFTs, diluting their value and contributing to a bubble mentality. The lack of scarcity and exclusivity has diminished the perceived value of many NFTs, resulting in falling prices.
Speculative nature: Much of the NFT market has been driven by speculation rather than genuine interest in digital art or the collectibles themselves. This speculative fervor led to inflated prices, and when market sentiment turned negative, many investors rushed to exit, causing a sharp decline in NFT values.
Regulatory concerns: Governments and regulatory bodies around the world have started examining NFTs coming in 2022. This has raised concerns among buyers and sellers about possible legal and tax implications, adding uncertainty to the market.
Lack of utility and environmental concerns: Many NFT projects have faced criticism for lacking practical applications beyond collectibles, casting doubt on their lasting value. Additionally, environmental concerns, particularly significant for NFTs on blockchain networks like Ethereum, have resulted from the high energy consumption required for blockchain transactions. Consequently, these environmental implications have caused some artists and collectors to reconsider their involvement with NFT technology.
Criticisms against NFTs
In your recent appearance on the “Joe Rogan Experience” podcast, Elon Musk, CEO of Tesla and SpaceX, shared his insights into the state of NFTs.
Musk highlighted a significant problem with many NFTs: their reliance on external servers rather than full blockchain storage. He expressed concern that this structure, where NFTs often serve as mere links to JPEG images on external servers, could lead to loss of access if these hosting companies cease operations.
To mitigate these risks, Musk suggested that embedding the JPEG or artwork directly into the blockchain would be a safer and more reliable approach.
Musk’s remarks found particular resonance among Bitcoin enthusiasts. They defend Bitcoin Ordinals protocol, which inscribes art and media directly onto the Bitcoin blockchain. According to them, this guarantees the longevity of these digital assets as long as the Bitcoin network remains active, offering a stark contrast to Ethereum’s more centralized approach.
However, the Ordinals protocol has its challenges. This raises questions about the scalability and efficiency of storing large volumes of data directly on the Bitcoin blockchain, potentially leading to increased transaction fees and network congestion.
Future of NFTs: Will They Recover?
The recovery and future growth potential of NFTs lies in the expansion of their applications and the evolution of market dynamics.
The NFT market is currently diversifying beyond its initial focus on digital art. This expansion includes sectors such as decentralized finance (definition) and gaming, where NFTs are increasingly used as collateral for crypto loans and integrated into play-to-earn (P2E) game models.
Furthermore, NFTs are making inroads into various domains such as cinema, sports, fashion, virtual worlds, ticket sales, and supply chain management.
This diversification is driven by big brands, following in the footsteps of pioneers like Reddit and Nike who have leveraged NFTs to increase customer engagement.
In terms of market growth, the prospects look good. Analysts predict that the NFT market could reach a valuation of $3.3 billion by 2027, growing at a compound annual growth rate (CAGR) of 18.55%.
In short, the NFT market is in a transition and maturation phase. Its expansion across multiple sectors, coupled with technological advances and efforts to address environmental concerns, positions it for a potential resurgence in relevance and growth.