Non-fungible tokens (NFTs) were all the rage in 2022, and the crypto market was abuzz with record-breaking NFT prices in the millions for the first half of the year. Investors wasted no time, scrambling for “blue chip NFTs” such as CryptoPunks and American NFT designer Beeple’s Human One, which sold for as high as US$23 million ($31 million) and US$29 million, respectively.
However, the rise of hacks and scams in the NFT space has led to dwindling investor confidence. Notable breaches include phishing attacks on NFTs from big-name players like Bored Ape Yacht Club (BAYC), Mutant Ape Yacht Club and Cool Cats, which witnessed losses of up to US$3 million as at April.
The reduced availability of NFT marketplace apps on critical platforms such as Apple’s App Store exacerbated the already decreasing demand for NFTs, with NFT transfers occurring as in-app purchases within supported applications subject to a 30% fee.
Compounded with the crypto winter and companies like Terra, Three Arrows Capital and FTX winding up, the NFT market average selling price went on a downward trend. Data from blockchain analysis firm Chainalysis shows that the average price of an NFT sale fell by 92% between May and July this year from US$3,894 to US$293. As at September, data from Dune Analytics shows that trading volumes of NFTs have slid to US$466 million from US$17 billion in January.
Hagen Rooke, a partner in fintech and financial regulatory practice at law firm Reed Smith in Singapore, tells The Edge Singapore that the NFT space could benefit from a rebound in sentiment and general confidence in the cryptocurrency sector. “This will depend on factors such as tighter regulation being introduced and observed, and more sophisticated marketplaces being able to restore trust.”
Other market observers like Antonio Fatas, an economics professor at Insead, are less sure and more sceptical that the NFT market can ever return to its days of excessive hype. He adds: “Let’s be realistic; there was no economic or business logic behind what happened,” says Fatas on the crash of the NFT market with the larger crypto space. “This was a result of yet another wave of ‘let me try to get rich fast’ with a new technology, where most investors dove into the product out of speculation rather than genuine interest.”
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“The market will need to come up with a new but different one,” he continues when asked about possible approaches to earn back investor confidence in the NFT space. “You cannot use the same narrative to fool investors twice.”
Chart: Chainalysis
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New applications of technology
Existing players in the space see more opportunities for growth, development and change during this time, with more innovation underway than meets the eye amidst the industry’s current chaos.
“Given that most NFTs are based on Ethereum (ETH) denominations, NFTs have taken a secondary hit from this latest crypto winter as investors attempt to reduce their exposure to ETH, the primary denominating ‘currency’ for most of the NFT market,” says Giulio Xiloyannis, co-founder of web 3.0 venture capital studio LiquidX and CEO of NFT gaming company Pixelmon. As at Dec 8, ETH is trading at US$1,233, down 74.8% from its all-time high of $4,878 on Nov 20, 2021.
“But if we take a step back, the primary impact from these macro events are liquidity draining effects witnessable in all industries,” he adds, explaining that NFTs are not any more or less affected compared to other markets in traditional finance (TradFi) or decentralised finance (DeFi).
“In reality, the underlying usage and investments in NFT-driven businesses have never been higher,” says Xiloyannis. “Entrepreneurs today are building on blockchain protocols and leveraging NFT contracts more than ever, which means that NFT fundamentals are now stronger than ever.”
Markus Thielen, head of research and strategy at Singapore-headquartered digital assets and financial services firm Matrixport, shares that optimism. He says the NFT market is expected to grow at a 31.6% CAGR over the next six years. “NFTs are not just digital representations of pictures, but will rather have a key impact on digitising ownership of actual real-world things, like real estate.”
The strength of certain NFT investments has come through in these times, where high-value, quality NFT projects have turned out better investments than other parts of the crypto universe. One example would be BAYC NFTs’ floor prices having risen by 34% to 67 ETH (US$83,000) from 50 ETH one year ago, as compared to Ethereum and Bitcoin (BTC) prices declining by 70% and 65%, respectively, over the past 12 months, according to data from CoinGecko.
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“Moving forward, one should invest through NFTs in projects that provide great holder utility, and not in NFTs without clarity on the holder utility provided,” asserts Xiloyannis. He adds that NFTs should shift towards being more of a conduit for solutions in the broader Web 3.0 space rather than as assets.
Agreeing with Xiloyannis, John Stefanidis, co-founder and CEO of NFT gaming platform Balthazar, says that his company is looking towards expanding into using NFT technology to solve problems around password and credential recovery. “This will further unlock categories like DeFi, and other products that are good but difficult to access for Web 2.0 users,” he adds. “There are still many products out there that require decentralisation.”
But will such innovation again propel NFTs to record-high prices? Stefanidis cautions against such expectations. “I don’t know if we will ever see the same NFT sales volume again in hundreds of thousands or even millions of dollars for a single NFT. And if they do, it’s probably for the wrong reasons.”
“What’s key is the varying applications of NFTs we will see in the future. For instance, what does it mean to own an NFT, or what else can we use this smart contract technology for? The question that we always ask is, what can be made better with the technology NFTs provide? What are we doing now? And how can that be made better in our life using this smart contract technology?” Stefanidis adds. “That’s going to be the questions we are asking and will start to see being answered.”
