Why Are NFTs Continuing to Decline?

What are NFTs?

NFTs, short for Non-Fungible Tokens, are a type of digital asset that represent ownership or proof of authenticity of a unique item or piece of content, such as artwork, music, videos and collectables.

Unlike cryptocurrencies like Bitcoin or Ethereum, which are fungible and can be exchanged on a like-for-like basis, each NFT is distinct and cannot be replicated or interchanged. NFTs utilise blockchain technology to provide verifiable ownership and provenance, ensuring scarcity, uniqueness, and originality.

The Rise and Fall of NFTs

NFTs have been around since 2014, but 2021 was the year it truly made its breakthrough into the mainstream.

Known as the “NFT Boom”, we saw many new projects, such as CryptoPunks and Bored Ape Yacht Club, taking the world of art by storm. NFTs were also sold for millions, such as Pak’s “The Merge” selling for $91.8 million in December 2021 — making it the most expensive NFT ever sold.

But like all good things, the NFT Boom saw its end when it crashed in the final quarter of 2022. The harsh crypto winter saw many crypto projects crash, major exchanges file for bankruptcy and the value of tokens drop drastically.

Of course, NFTs were no exception to this, but even as the crypto market starts to slowly recover, it seems NFTs are still struggling to regain their previous glory.

How did they become so popular in the first place?

While 2021 was the year of the NFT Boom, they first started gaining hype in 2017 with the CryptoKitties project — a blockchain-based game on the Ethereum network where players adopt, breed and trade virtual cats.

Then in 2020, Dapper Labs, the studio behind CryptoKitties, launched the NBA Top Shot — an NFT marketplace where basketball fans can buy, sell and trade NBA-themed digital collectables. This saw huge success, and by early 2021, it put up over $200 million per month in trading between February and March — more than the entire market produced over the previous year.

Celebrity endorsements, such as from the likes of Grimes, Elon Musk and Rob Gronkowski, also played a big part in adding further hype and ultimately skyrocketing NFTs to the mainstream. With new projects popping up, value continually increasing and significant sales for NFT pieces, this was truly the peak of the NFT Boom.

Why are NFTs still declining post-crypto winter?

While crypto winter is slowly melting away, NFTs are still feeling the pinch. Trading volume on NFT platforms has declined by 88%, while value for NFTs themselves has dropped by 80%.

So, why is the NFT marketing continuing to fall?

It’s difficult to pinpoint a precise reason, but several factors could contribute to this crash.

• Cybersecurity issues — NFTs have been criticised before over doubts about cybersecurity. For example, one such case reported by Elliptic in 2022 saw NFTs worth over $100 million stolen in a variety of ways. A further study also revealed that the value of stolen NFTs increased from $3.2 million to $15.4 million between the first and second quarters of 2022.
• Crypto’s Volatility — Cryptocurrency and NFTs have a strong correlation with each other, so you could say the market depends on crypto’s value. So, when the cryptocurrency market becomes bearish, this could also impact investors’ confidence and interest in buying NFTs.
• An Inflated Market — Overvaluation or an inflated market could also be a possibility for the decline in transaction volume. With such a hyped-up promotion and NFTs sold for millions of dollars in the past two years, this has led to impulse purchases and an overabundance of NFTs bought, thus ultimately resulting in burnout.
• The Economic Cycle — Some experts also believe that the crash in the market is similar to other market declines, such as with recession, increase in oil prices and other sectors. Even traditional stock markets face downturns, so the NFT market is no exception, but it may increase again in the future.

Overall, the NFT Boom of 2021 brought widespread attention and record-breaking sales, fueled by innovative projects and celebrity endorsements.

However, the subsequent crypto winter saw a decline in the NFT market, with decreased trading volume and value. That, and factors like cybersecurity concerns, market volatility, an inflated market, and economic cycles have also played a role in the decline.

But despite the current challenges, the underlying potential of NFTs remains, and as the crypto market recovers and matures, NFTs have the potential to regain momentum and contribute to the future of digital ownership and creativity.