NFTs Are Going Through Their First Cryptocurrency Winter: What Should Investors Expect Next?

3 min read

NFTs transmit a sense of community and belonging that is reminiscent of the early days of bitcoin, despite the fact that they are occasionally derided as easily reproduced digital images.

What Happened

Even high-end assets and collections like the Bored Ape Yacht Club have seen their prices drop, despite NFTs initially withstanding more than more popular crypto assets earlier this year.

Some investors hoped or thought that NFTs may perform better while being perhaps inevitable for the following reasons:

  1. They constitute a distinct market sector made up of devoted community members who frequently place sentimental value on the NFTs they own. The sensation of belonging and the capacity of NFT owners to interact with other holders within the collection are major factors that provide value to NFTs.
  2. Institutional capital has not yet entered the market, in contrast to assets like bitcoin and ether. Bitcoin was credited with pushing the price up to about $70,000 last year, but mainstream investors have also contributed to a close link between cryptocurrencies and risky assets like tech stocks.
  3. Additionally, buying an NFT is more difficult than buying bitcoin on a well-known exchange. The majority of assets are priced in other digital assets rather than currency, such ETH or SOL, necessitating the acquisition of these assets by prospective buyers.

Investors are now attempting to predict how they will perform in the second half of the year as the NFT market is ready to enter its first bearish cycle.

Broader Context

NFTs transmit a sense of community and belonging that is reminiscent of the early days of bitcoin, despite the fact that they are occasionally derided as easily reproduced digital images. Holders publish their NFTs on their social media pages as the face of their digital identity in the profile picture (PFP) avatar section of the market, which accounts for the majority of the value of the NFT space. Additionally, a member’s online identity being linked to her NFT portfolio may put social pressure on her to support the community and encourage longer-term holdings.

Access to exclusive chat rooms, tickets to real-world and virtual events, and other benefits are also available to some NFT holders. In order to confirm that a user has the required NFT in her Web3 wallet, such as Metamask or Rainbow Wallet, services like Collab Land that directly interface with Discord (the main chat tool used by NFT groups) are used to authenticate these rights.

However, the Fed’s concentration on cutting interest rates and shrinking their balance sheet to combat historically high inflation has had a spillover impact into the crypto markets, which is mostly to blame.

Since their 2021 top in November, the cryptocurrency markets have lost $2 trillion in value. Although small capitalization assets were the most severely affected, losing up to 99 percent of their value, the larger cryptocurrencies like bitcoin and ether were also affected, dropping 74 and 79 percent of their value from peak to trough, respectively. The overall market capitalization of all cryptocurrencies decreased by 73 percent, from $2.97 trillion to a recent low of $792 billion.

Key Figure

Market capitalization of all collections listed on data aggregation platform NFTGo decreased 40% from peak to trough, from $37.2 billion to $22.2 billion. Between these collections, daily trading volume has dropped sharply by 95% from its peak of $800 billion in January to $40 billion right now.

Outlook and Implications

The floor price of these collections has fallen slightly more than ETH even among the best-performing NFT collections (-79 percent ). Due to their relative underperformance, NFTs appear to be a risky, high beta play on the cryptocurrency markets, outperforming on the upside while underperforming on the downside. Of fact, throughout the recent bull market, the opposite was true.

While NFTs are a relatively new market category and are going through their first such period, Bitcoin is now going through its third major market cycle. Still, it seems that the course of both classes of cryptocurrencies will be influenced by the state of the overall market. Unless the Fed drastically modifies its trajectory, it is difficult to envision a significant rebound before 2023 given the tightening environment and rising recession risks as things stand.

Decision Points

Investors should take caution to buy NFTs that are substantially more liquid and supported by established teams and developers given the tough climate. Trading volume is one metric in particular that is important to monitor. A rise in volume could indicate increasing interest and attention from investors and consumers as they enter the area, even though it has been anemic recently throughout the entire sector.

Additionally, investors may find it easier to handle the turbulence of the NFT markets if their portfolios are denominated in the native crypto asset and lay less focus on the underlying ETH’s currency swings. Top collections are better positioned to increase in value when the market turns bullish since they have a higher probability of holding their worth in ETH terms (as assessed by floor price, volume, and community size).

The Mutant Ape Yacht Club (MAYC) is down 65% in ETH but down 86% in USD, and Moonbirds are down 58% in ETH but down 85% in USD from peak to trough. The Bored Ape Yacht Club (BAYC) is down 52% when denominated in ETH but down 80% when denominated in USD.

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