NFT Market Collapse: Reasons, Effects, and Future

Are NFTs dead? 

Certainly, you are not the only one who thought this when the mighty NFT market started its downfall trend. After enjoying glorious fame, the fall of non-fungible tokens left everyone shocked and panicky. Everybody anticipating the next significant drop in NFTs turned speechless at the losses they suffered.

As tragic as the decline of NFTs or cryptos monetarily is, it is also heartbreaking news, for it diminishes the promise of an alternative digital market that NFTs held. 

But what really went wrong with non-fungible tokens? Is there a way that the NFT market collapse can bounce back?

This article will analyze the cause(s) of the NFT market collapse and discuss the future of NFTs.

However, before dwelling on the reasons, let’s quickly have a glance at what non-fungible tokens are.

NFT: What is it?

Non-fungible tokens, or NFTs, are unique tokens or virtual entities. They can be the virtual representation of physical objects, such as art, properties, monuments, and others. The non-fungible tokens offer ownership to people over the products with the assistance of blockchain. The earliest mention of non-fungible tokens dates back to 2012. Know more about NFT for dummies.

However, it was only in 2017 that NFTs rose to prominence and gained worldwide popularity. Coming to the technical explanation of non-fungible tokens, one can say that it is a non-interchangeable units of data stored on a blockchain. This data cannot be destroyed, tampered with, or replicated. 

A blockchain can validate non-fungible tokens and provide them with extrinsic value. Some of the popular types of non-fungible tokens include digital artwork, collectibles, domain names, event tickets, and ownership records for physical assets. 

Did the NFT Market Crash? What does it mean?

Yes, the NFT market started to plummet in February 2022 and declined steeply by the end of the year. This came as a shock since the market showed tremendous growth, and some of the non-fungible tokens were sold for millions of dollars. Unfortunately, the market tanked, giving rise to numerous questions and doubts among the people.

Here are some statistics from various surveys that show how the market has declined:

• An 88% drop in the trading volume on non-fungible token platforms
• An 80% drop in the value of the non-fungible tokens
• Fall in the “Bored Ape Yacht Club” market cap by $2 billion
• A steep decline in the non-fungible token sales by $1.6 billion globally in the third quarter of 2022
• According to Chainalysis, the average price of non-fungible token sales dwindled rapidly, by 92% since the beginning of May 2022 (the price fell from $3,894 to $293) 
• The year-over-year sales of Axie Infinity and Gods Unchained were down by 93%. 

Some of the popular non-fungible tokens that have gone down in value are:

• “The Currency,” a collection of NFTs by celebrated artist Damien Hirst, fell 12.6% to $4,666.60
• “Bored Ape Kennel Club “fell 8.3% to $4,672.60
• “Moonbird” NFTs fell 4.7% to $8,397.50

This type of market collapse simply means huge losses to collectors, investors, and the organizations involved with it. 

What led to the collapse of the NFT market?

While the crypto market decline or crypto “winter” is one of the major reasons attributed to the NFT market crash, this is not the single reason that led to the decline. Numerous crypto and NFT experts have observed that a bunch of reasons led to NFT losses. Let us see what some of the reasons are:

Cybersecurity issues

One of the foremost reasons that have always plagued non-fungible tokens is distrust of non-fungible tokens’ safety. Although NFTs have been considered secure, some instances created doubts regarding their security. One such case occurred in 2022, where non-fungible tokens worth $100 million were stolen. 

Elliptic, a blockchain analysis company, chronicled this report and stated that such crimes are bound to increase in the face of the cryptocurrency crash. 

Furthermore, a study revealed that the value of stolen non-fungible tokens based on these scams increased from $3.2 million to $15.4 million between 1st and 2nd quarters of 2022. Thus, these kinds of theft reports will naturally affect the trust of an investor or collector. 

Crypto Volatility

The fall of cryptocurrency is one of the significant reasons for the decreased investor confidence and interest. As discussed above, crypto and non-fungible tokens have a strong correlation with each other, and in a way, the non-fungible token market depends on crypto. Thus, one can say that the valuation of non-fungible tokens is affected by crypto.

Furthermore, this crash has given rise to other sets of problems, such as layoffs in the metaverse and blockchain companies. In other words, volatility and value decline affected some big organizations, such as Blockchain.com, which announced huge layoffs. This is because of the decline in crypto and non-fungible token prices.

Inflated Market

According to Ethan McMahon, an economist, the overvaluation or inflated non-fungible token market is also a partial reason for the decline in non-fungible token transaction volume. If one observes the market trend of the past two years, it can be easily deduced that NFTs had a very hyped-up promotion. 

For instance, the famous digital artist Beeple sold his NFT creation for a whopping $69 million at an auction. Furthermore, numerous non-fungible token collections were sold for millions of dollars, like Bored Ape Yacht Club (this collection’s NFTs were bought for $2 million per piece).  Discover the most expensive NFTs of all time.

Apart from these, some celebrities endorsed non-fungible tokens. Elon Musk, Justin Bieber, Madonna, and Tom Brady are some of them who promoted NFTs massively. Naturally, this kind of publicity propelled the value of non-fungible tokens to great heights at an unfeasible rate.

As a result, NFT, similar to other markets, experienced impulse purchases, unregulated hype, and superabundance. All of these led the highly speculative and quick-moving non-fungible token market to a quick burnout. One may think that this market decline is making up for earlier overvaluation that non-fungible tokens enjoyed.

Economic Cycle

Numerous NFT experts feel that the crash in the non-fungible token market is similar to other market declines. The world is fully aware of recessions, hikes in oil prices, and other sectors. Every market goes through ups and downs in cycles, and the non-fungible token sector is no exception. So, this dip in the NFT market may improve in the future.

While all these are some of the contributing factors to the collapse of the NFT market, one cannot deny market factors, regulatory concerns, and the association between the crypto market and NFTs played a huge role that led to this crash. Since non-fungible tokens are bought with cryptocurrencies by most collectors, any fluctuation in the crypto market deeply impacts the NFT market. 

Additionally, the global economy and monetary policy are not in great condition prompting investors to pull away from riskier assets, such as NFTs. Therefore, this prevailing negative sentiment is also one of the factors that led to the market crash. 

So, will NFTs remain susceptible to the cryptocurrency market? That is yet to be determined, but let us see what the impact of this collapse was.

Impact of NFT market collapse 

The decline in the NFT market has impacted various sectors and stakeholders involved with it. Before the crash, non-fungible tokens were raging globally, with sportspersons, celebrities, artists, and big retailers endorsing this technology. 

The NFT industry is, however, working to restore customer trust due to cryptocurrency’s decline and FTX’s failure. The market collapse has severely affected investors’ conviction in non-fungible tokens, which may take some time to rebuild confidence. 

Apart from investors and collectors, the NFT crash has dented the prospects of NFT creators. Blockchain technology and Non-fungible tokens paved the way for artists to showcase their talent or creation on a wide platform. The artists got substantial monetary benefits and recognition on a digital platform that has been reduced. Overall, one can say that confidence and money took a great hit with the NFT market collapse. 

However, the fall taught many people to be cautious about investments and to have a basic understanding of market volatility. 

NFT Market Recovery in 2023

Although non-fungible tokens suffered a setback, recent reports state that the market is recovering. While it is too early to predict whether it will return to its earlier glory, experts opine that the setback is a hiccup. Numerous experts are asking people to have patience as the market recovers. 

The latest report from the DappRadar website states that the non-fungible token market and its trading volume are picking up. Here are some statistics from DappRadar that give a positive picture of the NFT market:

• The trading volume of non-fungible tokens from January to February 2023 increased by 38% touching $946 million, the highest trading volume since June 20, 2022.
• The trading volume on the Ethereum blockchain from January to February 2023 increased by 37.29% to $659 million. 
• NFT sales increased by 42%, reaching 9.2 million units.
• The number of Ethereum NFTs sold from January to February 2023 increased by 7.37%, touching just over 2 million.

Conclusion

Overall, the NFT market crash is an opportunity to regulate the market and make it more secure. Although the crash was a disaster, one cannot say that this is the end of NFTs. The market is returning to normalcy, and the upward trend offers positive hope to collectors, investors, and other stakeholders involved.