Just a couple of months ago, non-fungible tokens seemed to be everywhere. Visual artists, content creators, musicians, virtual marketplaces, investors, collectors – everyone bought into the hype, and many ended up making millions in the process.
Within a space of 3 to 4 months, investors poured $90 million into NFTs and digital collectibles, causing the overall market cap of NFT marketplaces to rise by 1785%, from $23 million at the beginning of this year to $432 million near the end of March.
Fast-forward to the present day, and this hype seems to have completely faded into the distance. On May 3, the NFT market peaked at $102 million in sales volume in a single day, with $170 million in NFT transactions in the week following the peak. But by the end of May, this figure had fallen to $19.4 million, indicating a 90 percent drop in transaction volume within a few weeks.
The total number of active NFT wallets similarly fell by nearly 70 percent – from over 12,000 in the beginning of May to just 3,900 by the end of the month.
Following this major crash, many media outlets and websites have concluded that the hype-driven NFT bubble has burst, with Gizmodo’s Tom McKay rhetorically asking, “Who could have seen this coming other than basically anyone?”
However, NFT industry insiders seem to be convinced otherwise. They argue that the NFT landscape is evolving, and as in the case of cryptocurrencies, this crash represents a necessary correction on the path to a stronger and more stable industry.
Here’s what crypto and NFT experts have to say about this recent crash, its causes and effects, and what it means for the future of NFTs.
Why did NFT sales suddenly plummet?
In Q4 2020, NFT sales totaled $93 million, before shooting up to more than $2 billion in Q1 2021 – an increase of over 2000 percent within a few months. This stratospheric rise in NFT transactions was bound to be followed by a sharp decline, according to John Kohl, co-founder and CEO of TuneGO, a music distribution platform that incorporates patented NFT support for artists.
“With all the excitement surrounding NFTs, the market needed a healthy correction to come back down to earth. A primary contributing factor was some good old-fashioned supply and demand,” said Kohl. “The period of hypergrowth caused a frenzy of NFT creators to enter the marketplace – and as it currently stands, the supply of NFTs greatly exceeds the demand, pushing NFT prices down and creating headwinds against price appreciation.”
New technologies typically follow somewhat predictable boom and bust cycles, as media promotion and hype cause the masses to jump on an investment before the core infrastructure and underlying technology are mature enough to handle the capital and social inflows. NFTs are no different, according to Cody Ryan, co-founder of cryptoasset research platform Clearblock Insights.
“Sooner or later the hype dies down, and the media stops reporting on the phenomenon 24/7,” said Ryan. “Meanwhile, the core technology is being built in the back end, and continues to mature before the next adoption cycle takes place. This is what the NFT ecosystem is currently experiencing.”
The NFT boom was accompanied by an almost instantaneous influx of mainstream influencers and organizations jumping in for a quick cash grab. “Many of these folks didn’t really care about the technology itself, or the positive impact it could have on a grander scale going forward,” said Mango Dogwood, community manager at Charged Particles, a blockchain protocol that allows users to deposit ERC tokens into any NFT.
“With this current market correction, we might also see some of the chaff being separated from the wheat, so to speak,” he added. “For those working in the space, there is no doubt about the efficacy of this technology. We're just keeping our heads down and building the future.”
Is the NFT crash related to the recent crypto crash?
The NFT bust is interlinked with the May cryptocurrency crash, which was partially the result of overspeculation in the crypto market. “We have so many crypto enthusiasts who just went through an immense bull run at the beginning of the year and made a lot of money. They were looking for crypto-relevant things to spend some of those gains on, and NFTs were the flavor of the month,” said Michael Blu, an early blockchain investor and co-founder of LGND. “Now that the crypto market is in a cool-down, people are no longer pumping massive amounts of money into NFTs.”
The crypto crash was a huge contributor to the NFT crash, according to Dogwood from Charged Particles. “When you keep in mind that the value of Ethereum, Bitcoin and the majority of crypto ecosystems dropped about 50% in the last month, it's much less surprising to look at a 90% drop in NFT sales,” he said.
Dogwood says this sort of cyclical market activity is par for the course, but with so many inexperienced users joining the NFT space, it's not surprising that many of them have panicked during this period of correction. “Really, it's just part of the crypto experience,” he said.
The volatility of the crypto market is proportionally affecting NFT transactions. Recently, fintech firms such as Circle have introduced more traditional options for buying NFTs, like via credit card. However, the majority of NFTs are still purchased with cryptocurrencies, which means that a decline in the value of crypto naturally results in less NFT buying power.
“Crypto’s instability is affecting the monetization value of NFTs. An artwork that was staged for sale at 0.25 ETH in March 2021 is not worth the same amount in June 2021, because the price of Ethereum has fluctuated by around $1500 since then,” explained Murli Shankar, author of a blog titled The World of Cryptocurrency. “Therefore, NFT enthusiasts – both content creators and traders – are taking a step back and waiting for the dust to settle.”
Is this the end of NFTs? Were they just a fad?
As the market for Bitcoin and Ethereum has started to regain some stability in recent weeks, the volume of NFT sales has been steadily going back up. This is an indication that the NFT market has survived the crash, according to a spokesperson at Hashers.ai, a company that uses artificial intelligence to create works of art released as NFTs.
“Investors and collectors already feel more confident, and are looking to purchase again,” said the spokesperson. “The NFT market needs a stable cryptocurrency environment to thrive. As long as the underlying crypto market stays relatively stable, NFT volumes will come back progressively.”
LGND’s Michael Blu believes that the NFT market is currently finding its new balance. He says a fall from last month’s peak may seem dramatic now, but in retrospect we will look back at this moment as just an initial step in a long evolution of the market.
Blu also points out that while NFT sales plummeted on the Ethereum network, other decentralized networks such as Worldwide Asset Exchange (WAX) have remained stable and continue to maintain healthy volumes.
“The ETH bubble happened because you had a group of crypto billionaires pumping a ton of money into the ecosystem to juice it for their own interest,” said Blu. “Meanwhile, WAX kept chugging along as more and more users entered the space. In fact, the WAX NFT ecosystem is currently booming and has been experiencing truly organic growth that will be far-reaching and long-lasting.”
Michael Pearl, COO of crypto firm Kirobo, says a crash like this one doesn’t mean NFTs are dead, but simply that they are still maturing. He adds that people who have been in the crypto industry long enough to remember the 2017 ICO bubble know that this is nothing new or unexpected.
“New technology brings hype; hype brings expectations; expectations bring disappointments. This cycle is more or less inevitable, and so was this crash,” said Pearl. “The technology behind it, however, is here to stay. We may not see a figure like $2 billion in NFT transactions the next time around, but I have no doubt that there will be another big round of NFT sales.”
Pearl says now is a good time to come up with more “mature” and sustainable use cases for NFTs. Those who have the foresight to figure these out will be the winners of the next bull run.
Dogwood from Charged Particles similarly argues that people who claim NFTs are dead see them only as “marketable JPEGs”, when in fact they offer much more than that. The application of NFTs as a tool to safely and non-custodially interact with digital assets of all kinds is only just being explored.
“Domain names, in-game assets, digital portfolios, applications, music, podcasts, event tickets, medical records, property deeds, and automatic royalties on the resale of any of these things – all these parts of our lives and many more can be digitally verified, authenticated, and trustlessly exchanged using NFTs,” said Dogwood. “They are here to stay.”
TuneGO’s John Kohl predicts that NFTs will not only survive this crash, but will continue to thrive in the creative community and eventually achieve mainstream adoption across multiple industries.
“Similar to the internet, the ‘bursting of the NFT bubble’ will be a healthy correction needed to stabilize the market for real and sustainable growth,” said Kohl. “The days of selling 10-year-old internet memes of rainbow pop-tart cats for $600,000 may have come and gone, but there is real value in NFTs that has not yet been realized.”
Like the internet and blockchain, it will take years and maybe even decades for NFTs to realize their full potential, according to Kohl. But in the grand scheme of things, that’s not a very long time in the evolution of a new technology, he argues.
“NFTs help establish authenticity of ownership that gives buyers an extra layer of confidence. This level of creative rights insurance, combined with the introduction of new technology platforms that create a more user-friendly environment, will result in sustainable mainstream growth and adoption,” said Kohl.
“So, are NFTs dead? The answer is no. We’re really just getting started.”