Are NFTs Dead?

The Macroeconomic Environment

Everything from stocks to bonds is underperforming and investors have consequently adopted a "risk-off" mentality as they look for safe havens rather than speculative opportunities. As NFTs sit on the extreme end of the risk curve, the sector has been hit especially hard. Project prices and trading activity have been slashed, exacerbated by the price volatility of crypto. The LUNA death spiral and following liquidations of some of crypto's biggest firms have sent crypto prices imploding, with Ethereum crashing from its all-time high of $4,800 in November 2021 to $1,320 at the time of writing — a retracement of over 70%. Even if the ETH value of your NFTs remained stable, you'd be down horrendously in terms of nominal dollar value.
 

Now, the consequences are finally hitting the real economy. We're already seeing widespread layoffs and citizens struggling to pay for gas. There are clearly more important things to worry about than speculating and collecting JPEGs, right?! Data from Google Trends confirms that the interest in NFTs peaked at the start of the year and has come down significantly since then.

Pundits are classifying the past year as an economic bubble akin to the dot-com companies and tulips of decades past. The sane and financially responsible have already left the space. It’s clear — NFT trading volumes have collapsed 97% since the start of the year — here's the Bloomberg article to prove it! The party is over. Your bags are going to zero. 

Or are they?

From the Ashes…

Now that we’ve gotten your attention, let's clear up a couple of misconceptions. First, the Bloomberg article is a misnomer. Two-thirds of January's trading volume is attributable to wash trading on LooksRare, as users exploited the ecosystem to farm the then-anticipated LOOKS token. When filtered out, aggregate trading volume for the month shrinks from the reported $17 billion to approximately $6 billion. The downtrend is still significant, but it's not apocalyptic.

Instead, a more accurate indicator of health for the NFT space is to examine the amount of daily active users trading on NFT marketplace platforms. According to data from Dappradar, we can observe that the number of daily users interacting on OpenSea and Magic Eden, the premier NFT marketplaces for Ethereum and Solana, have fallen 42% and risen 28% respectively from the end of March to the end of September — a far cry from the doomsayer headlines we've seen touted.

For OpenSea specifically, the downward spike to 14,000 users on May 14th was due to the LUNA death spiral and the second crash to 17,000 users on June 13th was correlated to the price of Ether crashing that day. Since then, the amount of daily active users on the platform has rounded off with an average of 26,000. It's worth noting as well that the overall decline of participants on OpenSea is partially due to the emergence of other Ethereum marketplaces. Traders have begun migrating to platforms like X2Y2 and Sudoswap because of the additional functionality and lower marketplace fees, compared to OpenSea's usual 2.5% cut.

Conversely, Magic Eden has seen increased user adoption since the release of y00ts, the long-awaited secondary collection from the DeGods team, at the end of August. The number of daily active users has risen from a low of 24,000 on August 21st to a recent high of 47,000 on September 8th. We suspect its outperformance in user activity compared to its Ethereum counterpart is due to the lower price per token and ease of use.

Survival of the Fittest

The table below, while non-exhaustive, compares current NFT floor prices on October 3rd to their all-time highs. As this table covers projects at differing price points, we can benchmark the magnitude of the overall price reductions seen during this market downturn. Much like the stock market, we see the 'flight-to-quality' phenomenon happening here. Investors are selling their riskiest projects and instead choosing to hold 'safer' flagship names like Bored Ape Yacht Club and CryptoPunks. Despite the prominence of these two projects, their prices saw a retracement of -45% and -49% respectively compared to their all-time highs. As we move down the list, cheaper projects with a smaller market capitalization saw more drastic losses with prices declining anywhere from -66% to -87%. Needless to say, vaporware and random art projects will certainly not survive.

There are reasons to be optimistic though, as quality brands continue to make headway. Last month, Yuga Labs worked with Tiffany's & Co. to create 250 custom-made CryptoPunk jeweled pendants available only to token owners, which sold very quickly for $50,000 each. Other leading projects such as Azuki, Doodles, and Moonbirds have all completed multi-million dollar funding rounds in the face of negative market sentiment. 
 

As we know from the stock market, market prices are not always an accurate reflection of real business activity. The best projects have managed their treasury and runway responsibly so that they will weather the current market conditions. The worst ones have stayed opaque about their balance sheet and real output.

Where do we go from here?

The current situation is reminiscent of the aftermath of the 2017 ICO bubble. Prices crashed, protocols went bust, and everyone was left wondering if crypto was dead. Grifters had to look elsewhere for their get-rich-quick schemes. But those with actual substance — legitimate enterprises that capitalized on the transformative potential of the blockchain — exploded into becoming established leaders during the next bull cycle. The same is happening now with NFTs. 
 

With the allure of easy money gone, projects can no longer command absurd valuations simply out of hype and clever marketing. A bleak forward macroeconomic outlook demands no urgency or FOMO involved. The pace of the market is slowing down and can finally undergo the proper scrutiny and reprimands to bad actors to make the space more inclusive as a whole. In these coming months, it will be painfully obvious as to what separates the wheat from the chaff. 

For curious investors, the checklist is simple: look to projects with sound management, sustainable growth models, and a dedicated community. These will set the stage for when the market inevitably flips back from fearful to greedy. If you still find yourself wanting a Cryptopunk, then probably NFTs aren’t dead after all.