After wowing the entire crypto community for the major part of 2021, the non-fungible token (NFT) market has been in a slump since the start of 2022, as the valuations for even the most popular NFT projects plummeted drastically from the previous year’s highs.
The average price of an NFT sale has fallen from $3,894 in May 2022 to $293 in July 2022, a drop of 92% in a span of just two months.
Corroborating this price trend, blockchain analytics platform Chainalysis research has stated that the number of active NFT buyers and sellers in July 2022 (49.6k) has fallen below even January 2021 (59.9k) levels, indicating a return to the pre-boom period.
When compared with the highs of January 2022 (960.7k) though, the situation seems grim at best and alludes to the waning investor sentiment surrounding these new-age digital assets.
Drying up NFT market leading to a precipitous fall in NFT valuations
Touted as being a one of a kind digital representation of popular art, memes, collectibles, and even GIFs, NFTs such as CryptoPunks (CRYPTO:PUNK) #7804, the Crossroads NFT, Hashmasks (CRYPTO: MASK20), and a few more notable examples exchanged hands for millions of dollars in 2021.
Even NFTs representing memes such as "Disaster Girl," "Doge (CRYPTO: DOGE)," and "Bad Luck Brian" sold for thousands of dollars, cementing NFTs as one of the hottest assets within the broader crypto space.
Fuelled by vocal interest from celebrities, marquee investors, and even self-made crypto billionaires, NFTs had even overshadowed the cryptocurrency market for the outlandish gains made in a matter of a few months.
However, with cryptocurrency prices tapering down since the last quarter of 2021, NFTs too were impacted, which can be seen in the apparent reduction in market participants trading NFTs.
This lack of demand coupled with the crazy valuations that most NFTs were commanding led to the collapse in prices.
An example of this could be seen in YouTuber Logan Paul’s bumblebee-styled NFT called K4M-1 #03 (CRYPTO: 0N1) investment that was acquired for $623,000 in 2021.
The NFT is now worth "essentially nothing," according to Logan, and is emblematic of the problem that many NFT investors are confronted with today.
NFT Trading volumes falling back to pre-2021 levels
While NFTs have been around since 2014, it was in 2021 that the total NFT sales hit a record $25 billion, representing a 26,200% jump from 2019 when the corresponding figure was a mere $94.9 million.
With NFT sales in June 2022 coming at just over $1 billion according to Chainalysis, NFT investors could take some solace in the fact that the NFT market is still above 2019 levels.
However, the slump in NFT sales and investor participation since May 2022 is something that needs to be watched, especially if a rebound in cryptocurrency prices occurs.
A broader bullish momentum is what is needed to revive not just the NFT space, but also the entire crypto market.
That said, experts believe that NFTs are merely going through a period of consolidation, with outlandish valuations being replaced with more utility-based pricing formulas.
In fact, with companies like Coca-Cola, Adidas, Samsung, eBay, and many others jumping onto the NFT bandwagon, the entire NFT market could see it maturing from a speculative bubble to a consumer-focused merchandise space.
As more nuanced consumers and investors enter the NFT fray, we could see a rejuvenation of sorts in the foreseeable future.
A period of consolidation or more pain ahead?
NFTs like theBored Ape Yacht Club(CRYPTO: APE) collection, comprising 10,000 uniquely minted collectibles representing Ape-like characters, have still retained a high floor price of >75 ETH even amid the current rout in the NFT market.
This collection along with other popular NFTs like CryptoPunks (CRYPTO: PUNK) has shown some resilience, supporting the argument that NFTs are currently in a bear cycle just like any other asset class.
Additionally, with companies like Meta Platforms Inc (NASDAQ:META) doubling down on their investments in building the Metaverse, NFTs will continue to see increasing integration and eventually more utility.
Applying the pricing behavior of popular cryptocurrencies like Bitcoin(CRYPTO: BTC)and Ethereum (CRYPTO: ETH) to the NFT space, it can be surmised that the next boom cycle for NFTs will probably power these digital assets to a level higher than what was seen in 2021.
Whether there will be more pricing pressure in the near future however depends on a range of factors including the global financial outlook, the raging war in Ukraine, and the duration of the current crypto winter.
For investors and NFT fans, though, this is arguably the toughest period and will test their dedication, patience, and passion for what was 2021’s most prolific asset class by a long margin.
