The NFT Market Amidst Crypto Winter
2022 has been a year of notable highs and lows in both the crypto and NFT spaces. Entering the year, the cryptocurrency total market cap was at roughly $2.3 trillion, still somewhat near its all-time high of $2.9 trillion in November 2021. And the NFT space was experiencing similar success with both trading volume and total market cap hitting all-time highs in April, reaching $1.1 billion and $36.9 billion respectively. However, the bull run party had to end at some point. While it wasn’t perfectly synchronous, both blockchain-based spaces have faced a severe market downturn.
And while both the NFT and crypto spaces are experiencing crypto winter together, there wasn’t a consensus if that would actually be the case.
The NFT Latency
There has been a lot to keep track of in the last few months since the initial crypto crash so it’s easy to forget that there was a significant lag between the crypto downturn and the lagging downturn in the NFT space some months later (from March to June to be exact). So, there were almost three months in which the NFT market continued to operate almost entirely independently from the crypto ecosystem despite its obvious overlaps — the currencies are used as the method of payment for nearly all NFTs. However, as a different asset class, there were plenty of reasons to think that maybe the NFT market would dodge, at least partially, the effects of the crypto crash:
1. Most notably, 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. While the same might be said of bitcoin or eth maxis, the communities are more of a social construct rather than the somewhat philosophical beliefs of the different coiners.
2. When buying and selling NFTs, more friction is involved compared to buying and selling bitcoin on a prominent exchange. As most assets are priced in a digital currency instead of fiat, potential buyers must first obtain other digital assets, such as ETH or SOL. And if NFT traders already had eth, sol, or another cryptocurrency in their wallet, the current fiat equivalent may not be as important in continuing the sales cycle in these ecosystems compared to cryptocurrencies where their value is stated in fiat terms.
3. While there is plenty of funding coming into the NFT space, it still does not yet have the amount of institutional money flowing into it like other crypto assets such as bitcoin and ether. It is well known that mainstream investors drove the price of bitcoin to almost $70,00 last year
4. Increasing adoption across multiple industries outside of the blockchain/crypto/Web3 space could have been helping to buoy the NFT markets as crypto was cheaper to purchase, making NFTs cheaper to buy in terms of ether or Solana for example.
The Spillover
Since January, the downward trend of financial markets, inflation, the collapse of Terra-LUNA, 3AC, Celsius, as well as various high-level hacks have not done much for the confidence in the crypto markets. From the aforementioned crypto market peak of $2.9 trillion, the total crypto market cap fell more than 70% to $792 billion. While bitcoin lost 74% of its value, and ether, the main currency used for NFT trading lost 79% of its value.
The Fallout
As we know now (unless you’ve been hiding in a Faraday cage recently, that is) the NFT market was certainly not immune to contagion. The weaknesses in the equities market had a spillover effect into the crypto markets and eventually, months later, the NFT markets as well.
At its peak, the collated market cap for all collections from NFTGo was stated as $37 billion. It then tumbled down to $22 billion by June 12th, losing over 40% of value. When looking at the trading volume of NFTs we see a similarly precipitous drop. April 19th had the highest trading volume with over $1 billion in NFTs sold. But, two months later, on June 16th, the trading on the day was only $65 million. And, as you can see on the chart below, since then, daily NFT trading volume has stayed between $55 million and $100 million.
The slow increase in overall market cap and relatively low trading volume may suggest that more people are holding their NFTs rather than trading and/or frequent trading is still occurring but at much lower price points than before the crash. With the additional market cap increase driven by new NFT holders or the release of new NFT collections into the market.
Despite the tumult in the NFT market and the stagnation of active traders, there continues to be a steady growth of unique NFT holders.
Finally, when looking at the data for the total transactions and average sales (USD), we see a drastic drop in the average price per transaction since the crash. The drop in the total number of transactions across all measured blockchains according to CryptoSlam from April to June was 13.6%, while the drop in average sales price was 73.2%. This shows an interesting shift in the market that may only signify the drop in the floor price of Blue Chip NFT collections (which have dropped significantly, particularly when denominated in USD), or perhaps it shows a shift in buyer behavior and changing preferences within the market.
The Rapidly Changing Space
Earlier in the year, the meta for an NFT collection’s success was usually predicated upon it having a few things like a roadmap that often led to some sort of eventual metaverse, various utilities, an active community that liked the art, and of course, some airdrops along the way to provide some added value. This includes collections like Cool Cats, BAYC, Doodles, WoW, etc. But in only a matter of months, or even weeks, the most notable drops that seem to be sticking around bucked the trend of incorporating this meta and instead, frequently adopted the CC0 free-to-mint model that focuses on a niche sub-culture in which the art and ethos resonate with. These collections include Rektguy, goblintown.wtf, and God Hates NFTees. Each of these, amongst others, like Rare Apepe YC and CryptoDickbutts, has had a unique strategy where the art and the message align perfectly with the community and empower the community members to leverage the original art for derivative projects, whether IRL or digitally.
It’s said that instead of crypto winter, “building season” would be a better way to describe the 2022 bear market, and perhaps the success of these projects leveraging a new model shows that there is no shortage of creativity and adaptability and perhaps it’s a great sign for the space moving forward.
©ArtAdvance, Tres Kitzmiller
2022
