Why the NFT Market Stalled and Selling Challenges?

The once-booming NFT market, where tokens fetched millions, is now stagnating. According to a recent study by dappGambl, 95% of over 73,000 NFT collections have lost significant value. Just a year ago, collectors were eager to purchase these digital assets for hefty sums, but the hype around NFTs has waned. Why has the enthusiasm diminished, and could this downturn be a potential silver lining for the technology?

From Boom to Bust

In February 2021, American graphic designer Mike Winkelmann made headlines by selling his digital artwork “The First 5000 Days” for $69.3 million at a Christie’s auction. This wasn’t just any sale; the artwork was an NFT, a digital JPEG image linked to a unique token on the blockchain. While the artwork itself could be easily replicated, the blockchain verified the buyer’s exclusive ownership rights.

Tokens, in general, are often interchangeable, much like how one dollar can be exchanged for another. However, not all assets, digital or physical, share this trait. For instance, renowned artworks like Edvard Munch’s “The Scream” cannot be swapped for Aivazovsky’s “The Ninth Wave”. This uniqueness in assets led to the rise of NFTs or non-fungible tokens. These tokens, entries on the blockchain, represent ownership of a unique item, be it art, music, or even a tweet.

The NFT wave, which began around 2017, reached its zenith between 2020 and 2021. It expanded beyond art, with the gaming industry, for example, embracing it wholeheartedly. Companies like Dapper Labs introduced NFT games like CryptoKitties, where characters, represented by NFTs, were traded for substantial amounts. In September 2021, a character from this game fetched nearly $900,000. Another company, Yuga Labs, gained fame for its collection of monkey images, some selling for as much as $2.8 million.

The year 2021 was a golden period for NFTs. The market volume skyrocketed to $17.6 billion, a staggering 200-fold increase from the previous year. The buyer base expanded too, growing from 75,000 in 2020 to 2.3 million in 2021. However, 2022 brought a reality check. By autumn, NFT trading volumes had nosedived by 97%. Even OpenSea, a leading NFT platform, wasn’t immune, seeing its trading volume shrink from $3 billion to $350 million within a year.

This shift in 2022 was palpable across various NFT categories, from gaming to art. Data from DappRadar revealed a 60% drop in NFT sales volume in just Q3 2022. The average sale price of NFTs also dwindled rapidly. What was $3,894 in May became a mere $293 by July. Notable NFT sales, like Twitter CEO Jack Dorsey’s first tweet, which had fetched $2.9 million, struggled to attract bids over $10,000 when relisted. This evolving landscape underscores the volatile and dynamic nature of the NFT market.

Causes and Implications

NFTs, primarily associated with the art world, allowed creators to transfer unique digital assets like songs, magazine covers, and paintings into the blockchain. However, their value never directly correlated with the traditional art market. Instead, they acted as derivatives of the broader crypto market. When cryptocurrencies, especially Bitcoin and Ethereum, faced significant downturns, the NFT market felt the repercussions. The decline in cryptocurrency values directly impacted the fiat value of NFTs, causing hesitancy among potential investors.

Research indicates a strong connection between crypto market dynamics and NFT sales volume. Typically, NFTs are purchased using cryptocurrencies, with Ethereum being the dominant choice. As the value of these cryptocurrencies dropped, it directly influenced the perceived value of NFTs in fiat terms. Over time, it’s speculated that the crypto art segment might evolve to mirror the traditional art market more closely, detaching from the volatile crypto market.

The market’s inflated nature became evident with certain artworks fetching astronomical prices during the NFT boom. However, as the hype subsided, the demand for NFTs decreased, making them less of a trend compared to their peak in 2020-2021.

Another contributing factor to the market’s decline is the growing concern around regulatory implications. There’s increasing apprehension that NFTs might be classified as securities, leading to potential stringent regulations and impacting their broader acceptance and adoption.

The Uncertain Future

By the end of 2022, NFTs were no longer the most attractive short-term trading asset. The initial hype around them, especially in the art world, seemed to have waned. However, despite the decline in NFT art prices, many still view NFTs primarily as a technology with vast potential applications in various life aspects. The current market has only scratched the surface by focusing on art, but the principles of non-fungible tokens can be applied much more broadly.

The downturn in NFTs as a crypto asset might shift the focus from tokens with no additional utility, like digital avatars, to innovative uses of NFTs in gaming, licensing payments, and real asset ownership verification. This shift suggests that the technology might benefit from the decreased investment demand for tokens. The next phase for NFTs could involve their integration into public and municipal services, such as property ownership verification. This perspective sees NFTs as a means of authentication, whether for concert tickets or property deeds.

Recent studies indicate a shift in perception of NFTs from investment assets to technology. In 2021, 76% of American buyers cited investment as the primary reason for purchasing NFTs. By 2022, this number dropped to 51%, while those buying out of collectible interest increased from 14% to 33%. This shift suggests that major companies should harness NFT technology to build stronger brands and more loyal customer communities.

Venture financing volume for NFT projects continues to grow, indicating the technology’s potential. However, the market is not without its pitfalls. The NFT boom of 2021 and 2022 saw monthly trading volumes reach $2.8 billion, with popular collections fetching millions. Yet, the current market paints a different picture: 79% of all NFT collections remain unsold, and supply significantly outstrips demand. Most collections today lack significant value, with less than 1% of NFTs priced above $6,000, a stark contrast to their million-dollar valuations just two years prior. This situation has led many to believe that the NFT market is characterized by speculative pricing strategies, far removed from the actual trading history of these assets.