With a staggering value of $21 billion at its bull market phase in 2021, NFTs have fallen a lot. Experts analyze over 95% of them might be completely worthless now. Why? You might wonder. Let us break it down for you.
NFTs started off as colored coins based on Bitcoin. No one really knew what they were or how they came to be until the crypto boom. And, with the Ethereum blockchain, mining and trading them became all too easy. Then, they took over the art world. Every Tom, Dick, and Harry in the world was in a frenzy to create their own digital art piece that they could call their own that would potentially be worth a lot in the near future.
In fact, the word NFT during that time was even named the top word of the year by the Collins dictionary.
So, what happened?
How did NFTs’ downfall begin?
We can blame the COVID-19 pandemic for a lot of things. But, for NFTs, it was actually a blessing as people stuck at home were psychologically more geared to buy digital assets. But the pandemic had to end. People were tired of being at home. They wanted to go and explore. Hence came the aftermath of the crypto boom.
Several factors led to NFTs' downfall. Let’s understand them.
1. The socio-economic factor
The environment might have thrived during the pandemic, but the people suffered. When they were suddenly left out of jobs, many struggled even to put food on the table, while many started panic hoarding. All of which contributed to the rise of inflation and the lack of disposable income to spend on digital assets.
2. Hacks and lack of security
In an interview, Bill Gates famously said that this NFT trend is “100% based on greater fool theory”, a theory that talks about inflated asset value if enough people are willing to pay for it.
The rise of NFTs can also be attributed to the herd mentality or FOMO for Gen Z. This, in turn, opened up many income avenues for scammers and fraudsters who started creating fake blockchains to lure in naive investors. Not only that, but the whole landscape became a target for Ponzi schemes, money laundering, and fraud.
Following this, many people lost interest in or grew scared of trading in this sector, contributing to the downfall of NFTs.
3. Failure of the big players
FTX, a behemoth among crypto exchanges, sought refuge in bankruptcy court towards the end of 2022, citing a severe liquidity shortage.
In May 2022, the Terra blockchain witnessed the sharp fall of its digital coins, TerraUSD and LUNA. These two tokens hemorrhaged nearly 99% of their value, leaving investors nursing wounds to the tune of over $60 million. Therefore, these events and problems set the stage for a big crash in the NFT market that left NFTs worthless.
4. Supply vs demand
NFTs are a classic example of ‘the higher you climb, the harder you’ll fall.’. In the beginning, everything was peachy. People lined up to get their hands on the hot, new thing, and brands capitalized on that. Everyone wanted to get the digital token out of their products, and soon, the market was flooded with every imaginable NFT. It was the time of the NFT bubble, where everyone felt that NFTs were the next bitcoin.
Celebrities were endorsing it. Powerful brands were investing in it. Blockchains to mine them were being created. You name it, and it was being done. But, soon enough, the bubble started to burst. People didn’t want to spend money on tons of digital tokens just so their metaverse avatar could wear different clothes. And then came the inevitable.
Supply surpassed demand significantly. And we all know what that means. The value of the once valuable token was now brought down to not even a fraction of its previous value. Take the example of MacContract, which has a floor price of $13,234,204.2, but its NFTs are worthless now as its all-time sale value is just $18.
Today, its current floor value stands at $102.72.
5. Wash trading
Wash trading is illegal for most markets, i.e., stocks, bonds, ETFs, etc. But, due to a lack of clarity in regulations, crypto and NFTs did not fall under the umbrella. Therefore, it does seem plausible that the projected value of NFTs was so because people were wash-trading it.
What is currently taking place in the NFT market?
- GameStop, the video game retailer, has sadly closed its doors for its NFT marketplace nearly 1.5 years after its launch.
- In a surprising twist, Twitter has quietly scrapped its hexagonal NFT profile pictures just two years after introducing them.
The NFT industry has seen a meteoric rise and fall, but we don’t think its current position is here to stay. Digitalizing the art world, in particular, can have many impactful uses for NFTs. Even privatized documents such as a home deed can be turned into valuable digital tokens, which can then facilitate ease of transfer for the next buyer. Additionally, NFTs may have gone down in other avenues, but gamers still enjoy the uniqueness that an NFT provides them.
Interested in creating artwork for your very own NFT? Contact us.