It’s easy for those who live and breathe NFTs to forget they are a relatively new technology that can leave the average person scratching their head. The NFT evolution is an entirely new way of thinking about ownership, possession, and value transfer. Unless you are a crypto head or a techie and have fully bought into a decentralized future, NFTs take some getting used to.
While NFTs were invented in 2014, it really wasn’t until 2017 that people started to sit up and take notice of them when CryptoKitties started selling tradable NFT cats. Like many innovations that came to be as a result of the rise of blockchain technology, NFTs suffered through the 2018 and 2019 Crypto Winter. However, in 2021 NFTs became Collins Dictionary’s word of the year. In 2022, NFTs have become a $17 billion industry which is up an incredibly 21,00% over last year. To compare, in 2020, the NFT industry was only worth about $82 million.
In this report, we attempt to break down what’s been happening in the NFT industry, how we got where we are today, and some predictions about the future. We will look at some of the major trends, what major players are saying and doing, and what it all means for creators, collectors, and investors.
How We Got Here
There is little doubt that the COVID-19 pandemic played a key role in the rise of NFTs. When access to travel, museums, movie theatres, and stadiums was restricted, people had to find other outlets and communities online. The result was a boom in the digital realm. NFTs and crypto were beneficiaries, but other digital platforms were high in demand as well. Netflix, for example, added 16 million new subscribers during the pandemic.
Another reason for the popularity of NFTs can be attributed to the media frenzy surrounding them. Of course, it all started when Beeple’s, “Everydays” sold for $69 million, seemingly out of nowhere, becoming the third most expensive work to be ever sold by a living artist. This, of course, became a massive news story. Almost every article in the mainstream media became about how some young teenager or a broke artist made millions of dollars selling NFTs, which fueled the flames, even more, causing more hype, and driving up prices. It didn’t take long before the frenzy was feeding on itself, taking on a life of its own.
Objectivity In The Markets Explained
While more volatile, crypto has generally followed the trends of traditional markets. Bitcoin’s popularity rose out of the subprime mortgage crisis, and from 2009 to 2010, Bitcoin’s price rose despite the economic depression felt around the world. For those early adopters who saw Bitcoin’s potential, it was a welcome reprieve from traditional markets that were taking a beating. However, according to the well-known financial blog Investopedia, since 2017, crypto and crypto assets have seen their market correlated with the stock market. They follow the up and down market trends, just like other traded commodities. When the economy is bad, crypto is down, and when the economy is doing well, the crypto market is up. Financial experts call what we are now in a “bear” market when the economy is in depression and a bull market when the economy is thriving.
If you’ve been paying attention to the financial markets in general over the last twenty years, what we are seeing in the crypto and NFT market is nothing out of the ordinary. This is according to a Bloomberg News whitepaper released late last year. Bloomberg studied the financial markets and, using models, has concluded that the crypto market is well within normal parameters.
The key is looking at the data objectively over time. To give an example, most people won’t remember that in 2018, the stock market had its worst December since 1931. The S & P fell more than 11% when a trade war intensified between China and the United States, and the government raised the interest rates. Yet most people forget about the stock market, only remembering that Bitcoin fell by about 65% that year.
Since the beginning of the pandemic, governments all across the world have been propping up their economies with bailouts, loans, and low-interest rates to ensure that people were financially stable as businesses had to close down and borders were shut. Now that the pandemic is winding down and borders have opened up, we are seeing the effects – namely high inflation, but also supply chain issues resulting from the shutdowns.
That’s not to say everything could have been foreseen. The war in Ukraine and the sanctions NATO has put on Russia have increased the pressure on world economies, especially with gas prices which have certainly caused financial markets to drop. This has had a huge impact on the financial markets all over the world and of course, impacted investors.
The Current State of NFTs
If you look at the crypto and crypto asset markets in isolation, it hasn’t been a good year. Crypto has seen a staggering $1 trillion wiped from its market cap. The so-called algorithmic stablecoin TerraUSD crashed, and at the time of this writing, trading has stopped, and it has been depegged from the US dollar. There have been calls to investigate what happened. Bitcoin prices have fallen steadily for the last two months. Declining nearly 60% from November’s all-time high. This has caused huge ripples throughout the crypto and blockchain industry resulting in a decrease in trust and hesitation among investors.
Some venture capitalists and investors are understandably nervous. However, overall, perception has shifted as crypto is more globally accepted. This recession is different from 2018 in a few key areas. During the 2018 downturn, the conventional wisdom on Wall Street was that crypto would die out and that investors were seeing the beginning of the end. Of course, that didn’t happen.
Now, you almost never hear any serious investor say that, despite the drop in crypto assets. Some investors like Charlie Munger and Warren Buffet might disagree with the basic ethos of crypto, but even they cannot deny the technology is here to stay. Today it’s hard to find a major financial institution that doesn’t offer some kind of crypto product or service. The major financial company Fidelity investment now offers employers the ability for their workers to put Bitcoin into their 401k. Financial apps like WealthSimple and Robinhood both offer simple ways for regular non-technical investors to get into crypto. Robinhood went further and just announced a new Web3 Wallet that allows its users to stake, yield farm, and buy NFTs without ever leaving its own ecosystem. This new wallet is aimed at more advanced crypto-savvy users.
Paypal and Square (which is now called Block because of its shifting focus to blockchain technology) are allowing people to pay with crypto. Brazil’s largest digital bank began offering Bitcoin trading to customers and plans to invest 1% of its treasury into cryptocurrency.
Many mainstream companies across many industries took interest in cryptocurrency and blockchain in 2021. AMC, the entertainment company, for example, announced it will be able to accept Bitcoin payments for tickets by the end of this year. And recently, the Japanese investment banking company Nomura announced a new 100-person unit devoted to working within the cryptocurrencies, DeFi and NFT spaces.
Here in Canada, the leading contender for the top spot of the conservative party is a strong supporter of cryptocurrency and, if elected, plans to make Canada a leader in cryptocurrency. Meanwhile, Bitcoin’s global mining power continues to surge toward all-time highs, indicating that miners are optimistic about the future.
All this indicates that major investors – both in governments and large institutions – are increasing their investments in blockchain technology and getting ready for the future.
To NFT Infinity and Beyond
Where will the NFT market go from here? Believe it or not, this incredible decline has created a real opportunity for serious investors and could even be seen as good for the industry as a whole.
The sudden dip in the prices of NFTs means those creators and investors who weren’t serious about the technology or just got into the NFT space to make a quick buck will likely be dissuaded from continuing. This includes scammers and hackers who also wanted to capitalize on the hype in the space.
For collectors and investors who can stick it out, it means that the projects that are doing well are strong and stable and will be able to survive these tough market conditions. This year, the projects that were overhyped and underdeveloped have likely collapsed or simply disappeared altogether. With fewer projects, investors don’t have to look as hard to find good projects and won’t have to worry about bottoming out.
This new phase of the NFT market is not necessarily bad for the industry, according to an article in Yahoo Finance. As a whole, if investors tighten their purses it often makes projects and creators better. No longer can just anyone get money for a half-hearted or lazy project. The projects now really have to earn the money that is invested in them – and the money is there for the taking. This is good for everybody from investors, creators and collectors.
While the money might not be as free-flowing as it was last year, venture capitalists are still seeing lots of opportunities within the space. A string of mega-rounds of funding has been given out totalling close to half a billion dollars. This is despite the continual downward slide of Bitcoin, cryptocurrencies and NFTs.
Promising NFT projects are still getting funded and there is still money flowing into the industry. One such example is the VC firm Andreessen Horowitz has raised $4.5B for its largest cryptocurrency and blockchain fund yet. The fund is the firm's fourth cryptocurrency and Web3 fund. Three billion dollars from the fund is earmarked for venture investments, with the remaining $1.5 billion is for seed investment.
In one of the latest fundraises, Cryptoys raised$23 million with partners Dapper Labs to bring NFTs for kids on the Flow Blockchain. This is despite the challenging market circumstances, and that building an NFT project for young kids, who probably don’t understand the technology, is especially daunting, according to TechCrunch.
On a smaller scale, but still significant, an app named Floor which aims to make NFTs more accessible to the average investor just raised $8 million in a Series A round, according to CoinDesk. The app offers NFT-specific portfolio tracking, real-time alerts, and multi-wallet support, making it easier than ever to buy and sell NFTs.
What Does This Mean for the Industry?
There are lots of opportunities within the NFT space which will eventually fuel the metaverse. Strategic Market Research believes that the metaverse could be worth $1.6 trillion by 2030 while a separate report by Morgan Stanley said luxury NFTs could generate as much as $56 billion in the metaverse by 2030.
In the technological life cycle of blockchain, NFTs, the Metaverse and cryptocurrencies, it’s still early days. While NFTs might not be the fad that they were at the beginning of the year, the NFT marketplace has already grown to $41 billion this year and are close to passing conventional art sales, according to Chainalysi, a blockchain research company.
There will also be a continuation of big brand adoption of NFT Technology. This year, Samsung will introduce the world’s first TV screen-based NFT marketplace aggregator, a platform that lets you browse, purchase, and display your favourite NFTs.. The fashion giant Gucci announced their big move into the NFT space with the SuperGucci collection, which features ten collaborative pieces. Coca-Cola is also creating its first ever NFT project on OpenSea. As large corporations continue to develop precedence in the NFT space, this will likely see more brands utilizing digital ownership and creating new strategies for integration and interaction, according to an article published on TheStreet.
The Next Market Cycle
If we look at the adoption cycle of NFTs, you can find correlations and similarities between the dot-com boom and what is happening now. Back then everybody rushed to create anything and everything online, thinking that it would turn into a moneymaker. Many of these ventures failed including Pets.com and eToys.com. These companies made the mistake of thinking that by simply having a great domain they could be sold for millions or even billions of dollars.
However, only a handful of companies found successful business models that helped make the internet a more compelling experience. These include many online shopping sites, Google's search engine and its profitable approach to keyword-based advertising, as well as eBay's auction site, Priceline discount travel company, and Amazon all became stronger and more resilient. These companies paved the way for even more successful, disruptive companies like Shopify, Airbnb and Uber.
While the market is down, many businesses are getting ready for a crypto future. In a recent study by Deloitte, they polled 2,000 senior executives at retail organizations from a variety of industries about digital assets. More than 85% of the executives polled say their businesses are giving high priority to accepting crypto payments. Of those executives, nearly 75% of the respondents say, their organizations planned to accept crypto payments within the next two years, only proving further adoption of this technology.
What’s Next for NFTs?
While we can’t predict which NFT projects will survive, DapperRader, which tracks NFTs, believes the larger, better-funded projects like CryptoPunks, Bored Ape, and Doodles, will be resilient and are likely safe long-term investments. According to NonFungible’s Q1 2022 report, one of the most trusted names in the space, there was a significant decline in total NFT market volume, with a drop of almost 50% in sales. However, this drop was also accompanied by a much smaller 5% drop in the volume of dollars traded. This is largely driven by an increase of almost 80% in the price of NFTs between Q4 2021 and Q1 2022. While larger projects have declined with the rest of the industry, there is no lack of interest, and trading is just as active as it ever was. Just recently, Yuga Labs, the creator of Bored Apes, raised about $320 million worth of cryptocurrency in the sale of its virtual land this year. This demand for this virtual land was so huge, it disrupted other activities on the Ethereum blockchain.
With nearly $8 billion traded in the first quarter of 2022, the market cannot really be considered to have collapsed, according to NonFungible’s Quarterly report. Continuing only in the report, it states: ‘we are seeing more of a form of stabilization, in line with the last quarter of 2021.’ Estimates by NonFungible suggest that around a quarter of a million people still actively trade NFTs every month on OpenSea's platform. Despite the drop in prices, that’s still a large number of active traders and there is lots of reason to be optimistic about the near future.
One example is crypto payment services provider MoonPay which announced the launch of a new platform called HyperMint that enables large companies and brands to create, manage and mint utility NFTs at scale, which will integrate the technology further into everyday usage.
Until recently, NFTs have almost exclusively been used as collectables. However, as the technology becomes more established, businesses are starting to understand that the long-term viability of NFTs requires them to have functional uses beyond this collectable element. For example, NFTs can be used to create a powerful customer loyalty program. Each customer can be issued an NFT and, with it, a permanent and unique blockchain entry. This NFT then serves as the customer’s proof of being part of the programs, and relevant data about visits and discounts can be handled digitally too.
Cash-strapped museums which have been hit hard by the pandemic are using NFTs to regain some of their lost revenue. A group of Italian museums, including the iconic Uffizi Galleries in Florence, have recently released NFTs of six famous Italian masterpieces. The British Museum also recently launched NFT collections with prices for some NFTs starting at $5,660 while the first-ever NFT-only museum launched in Seattle. This is only the beginning of what will be a fully virtual museum experience, giving patrons the opportunity to visit in person or having the same experience virtually..
No matter what type of markets you follow, they will always go up and down based on a variety of complex factors, including supply, demand, inflation, and other economic conditions. It’s important to remember that cycles end and new cycles take hold, and we will continue to see fluctuations just as we’ve seen throughout history.
Bear markets, like the one we are seeing now, often have some amazing opportunities and savvy creators, entrepreneurs, and investors are less swayed by short-term market activity and more focused on building amazing, sustainable businesses that create and deliver value, and positively impact the world.
Regardless of whether you’re an investor, an entrepreneur or a creator, you need to start with the fundamentals. Because the NFT space moves so fast, it can be tempting to jump in now and ask questions later, but it pays to stop and examine your reasons for getting in, what sort of value you want to create, deliver, and or extract from the market. Do your research and act cautiously. Some may be able to run before they can walk, but many who jump in without having a purpose and an end in mind, even if that changes in the future, get caught up in the excitement surrounding the space and risk losing everything.
There will be challenges, including scams, fakes, forgeries, and, of course, bubbles. But at the end of the day, NFTs are facilitating the human need for collecting, exploring, and earning and that is not going away, according to Yohann Calpu, the VP of CryptoSlam.
The cycle will continue to spin and there will be more bull and bear markets to come. Now is as great of a time as ever to get more involved in the NFT space as long as one stays true to the fundamentals of building a great business. There is strong data as demonstrated in this report, that NFTs, while losing value, are going to be an important component of future innovation which is why we are still seeing investment within the industry.
Written by Joel Mark Harris