Non-fungible tokens (NFTs) have experienced a severe downturn in the market, leading many to believe that the NFT bubble has burst. The value of these digital collectibles, which were once traded for large sums of money, has significantly decreased. So, what led to this turn of fate for NFTs, and is there any hope for their future?
First, it’s important to understand what NFTs are. Non-fungible tokens are unique blockchain-based assets that allow individuals to claim ownership over digital items. Unlike fungible items, such as money, which are interchangeable, NFTs represent something distinct and cannot be replicated. However, the fact that digital assets can be easily copied raises questions about the true value of NFTs. Essentially, an NFT is a receipt that demonstrates you’ve paid for something that others can get for free, which is a dubious basis for value.
The two most traded sets of NFTs are the Bored Apes collection and the CryptoPunks collection. Both sets consist of similar-looking but unique figures, each with distinct characteristics. However, many find these collections uninteresting, with the CryptoPunks, in particular, featuring basic computer-drawn faces.
So why did people buy NFTs? While NFTs first emerged about a decade ago, their popularity skyrocketed in 2021. Much like Bitcoin and other speculative tokens, greed was a significant driver for investment in NFTs. The initial price rises attracted people hoping to make substantial profits. NFTs essentially functioned as a form of gambling, lacking any fundamental value. Profits were only attainable by finding a “greater fool” willing to pay even more for the NFT. Consequently, many famous individuals talked up NFTs to create a fear of missing out.
However, all speculative bubbles eventually burst, and NFTs were no exception. Google searches for “NFT” and trading volumes have significantly declined, indicating a decline in interest. The prices of popular NFT collections, such as Bored Ape NFTs and CryptoPunks, have plummeted by about 90% and 80%, respectively. A recent report estimated that the value of 70,000 NFTs out of 73,000 is now zero, leaving millions of people with worthless assets.
Numerous factors contributed to the collapse of the NFT market. The decline in Bitcoin and cryptocurrency prices, the collapse of the FTX exchange, and the exposure of scams all impacted the market. Additionally, the lifting of COVID lockdowns provided alternative ways for people to spend their time, while higher interest rates made speculative assets less attractive.
Prominent figures who previously supported NFTs began to distance themselves from the trend, acknowledging their losses. Even the British Prime Minister’s plan for the Royal Mint to produce an NFT was abandoned. Some individuals, who had foolishly used their NFTs as collateral for loans, faced significant financial losses.
While NFTs are unlikely to disappear completely, they are likely to fade from public discussion and continue to decline in value unless an actual use for them is found. They will likely join the ranks of past speculative bubbles, such as Dutch tulips and dotcom stocks, in the history of speculative follies.
Overall, the NFT market’s dire straits serve as a reminder of the risks associated with speculative investments and the importance of thoroughly understanding the true value of assets before investing in them.
