The NFT mania had reached a tipping point in 2021 when digital art started selling for millions of dollars. So-called ‘PFP’ (profile-picture) collections of apes were selling for up to $500,000 per piece, while a digital artist named Beeple sold a collectible for a record price of $69 million. But as the crypto market crashed, so did NFTs and their overly-inflated value.
The cryptocurrency market has recovered within the start of the new year. Bitcoin and Etehreum have retraced to $23,000 and $1,600 respectively. Moreover, numerous altcoins have seen ever larger retraces, with Litecoin returning to its March 2022 highs. This leaves one question: now that crypto moved, will NFTs come back?
Today’s article explores the state of the NFT market, how well it recovered, and whether it has any future potential for growth. Although non-fungible tokens experienced major growth in the last two years, we are yet to see whether they will make a comeback.
What Is an NFT?
An NFT is a non-fungible token on the blockchain that represents a certain material or immaterial object. NFTs are different from cryptocurrencies because they’re non-fungible – meaning that they have unique traits and varying market value. If crypto is cash, think of NFTs as the real estate market where every home is different.
NFTs are most commonly digital artwork. Many cryptocurrency enthusiasts have created artwork collections that allow investors to join decentralized communities (DAOs) and represent themselves over the internet by using their NFT as a profile picture. Some collections also provide yields, raffles, lending, and other activities.
The typical NFT collection contains up to 10,000 unique tokens. Each token has its own special artwork. The collection itself can have certain traits that are distributed and randomized across the collection. Some NFTs can be rarer than others by having uncommon traits, therefore having a higher market value.
The NFT market has collapsed since November due to crypto’s very own market crash. NFTs are comparable to altcoins due to the fact that they have more speculative than fundamental value. Combined with poor liquidity and low interest, many have significantly decreased their investing activities in the NFT sector.
Although NFT sentiment still remains relatively low – shifting slightly positively in recent weeks – data shows that the NFT market has seen a sudden surge in volume last month. In fact, it seems that the sector retraced to a level of market activity not seen since August last year.
Statistics from Dune Analytics shows that volume on crypto’s largest NFT market OpenSea reached $466 million in January. NFT trading volume has almost doubled compared to December. At a monthly trading volume of $502 million, August was the last time NFT sales were this high.
Individual collections have seen a sharp rise in volume last week alone. For example, the fourth-largest NFT collection on OpenSea, Bored Ape Yacht Club, had its trading volume increase by 60% in the last seven days.
Meanwhile, data from OpenSea shows that its second largest collection, CryptoPunks, had seen an increase of 28% in trading volume over the past month. Other collections such as Mutant Ape Yacht Club, Azuki, and The Potatoz, have seen a monthly rise in trading volume by 29%, 59%, and 26% respectively.
Why Did NFTs Go Up?
The most possible reason behind the sharp change in sentiment is Ethereum’s recent price action. It’s worth noting that Ethereum is the largest crypto ecosystem for the NFT market. And over the past month, ETH has jumped 43% in value – rising from its December lows of $1,100 to $1,600.
The number of ETH exchanged on OpenSea has also increased. NFT collectors traded 306,645 ETH in January, while the same figure remained 227,419 ETH the month prior. If the trend continues, we could see even more Ethereum tokens come to OpenSea.
NFTs basically act as a financial instrument for holding leveraged ETH. A collectible can not only increase in its dollar value, but also in its ETH value. And if both the price floor of an NFT collection and the dollar price of ETH rise, you can earn more money holding the NFT than you would simply holding ETH alone.
Ethereum’s price recovery is an indicator of the project experiencing a healthy recovery. And should the entire market recover, Ethereum will surely head into another bull market. Therefore, NFT collectors have a reason not only to hold onto their investments, but to push more capital into NFTs as well.
NFTs have the potential to rise in value and trading volume as long as crypto continues the bullish trend it had established in January. There is little to no possibility for NFTs to stand on their own due to their highly speculative value. So without crypto trending up, there is no reason to believe that NFTs will do so.
Why You Shouldn’t FOMO Into NFTs
Yes, both crypto and NFT markets have recovered quite nicely in January. But that’s no reason to FOMO and splurge your salary without thinking twice. Although NFT trading volume on OpenSea has increased, it is nowhere close to the level seen during the height of the bull market mania in 2021.
If we take a look at the previous chart again, you can see that NFT trading volume is nowhere close to its previous record highs. The average trading volume oscillated between two and three billion dollars during the peak of the NFT mania. The digital collectible market currently only captures around 10% of that volume.
Data aside, the hype simply isn’t there. Like I mentioned before, the value of an NFT is mostly almost entirely speculative. The media hype surrounding non-fungible tokens has completely disappeared, and there is no mainstream interest for such tokens to be seen outside of crypto circles. For NFTs to enter a bull market, they have to do a complete repeat of 2021.
NFTs might very well reach similar market conditions if crypto itself were to enter a bull market. But for that to come true, artists and developers alike have to introduce a utility that will make simple JPEGs stand out from altcoins and incentivize investors.
Are NFTs Still a Thing? Deciphering the Market
Hardcore NFT collectors haven’t disappeared. Many communities across both Ethereum and Solana are still working hard on improving their collections and bringing various forms of utility to investors. Those who kept HODLing during the bear market will likely continue holding onto their precious NFTs in the future.
A simple stroll through Crypto Twitter shows you that all kinds of NFT communities are alive and well. Investors still hold their collections as PFPs, while developers continue building financial instruments into their NFTs. In fact, you might think that NFTs haven’t gone anywhere due to how active their DAOs and Discord servers are.
Yes, NFTs are still a thing. But for them to become the NFTs we have all loved in the last two years, they have to transform into something better. An NFT cannot simply be your digital online avatar, it has to provide something more than such a basic use case.
Many work towards integrating NFT collections into new Web3 games, building NFT lending, or creating a much more social experience for non-fungible token holders. While revitalized speculative value might lead to further growth, what the NFT market needs for long-term holders is fundamental value that at least stands side-by-side with speculative value.
Whatever ends up happening, one thing remains sure: the future of NFTs depends on the crypto market. Cryptocurrencies such as Bitcoin and Ethereum have to come back to their once record-high prices. Only then can we relax our risk-management and entertain the thought of getting back into NFTs.
Want to learn more about NFTs? I recommend reading the following articles:
Marko is a crypto enthusiast who has been involved in the blockchain industry since 2018. When not charting, tweeting on CT, or researching Solana NFTs, he likes to read about psychology, InfoSec, and geopolitics.
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