NFTs: Are they on the exit route or will they emerge stronger after correction?
Once riding on the flying horse of success, NFTs now struggle to survive through the acute slump. With many NFTs trading at up to a 90% discount from their last year’s peak value, it is clear that NFTs have lost their charm. The burning question is, why did NFT fail? The answer to this question can also hint at the possible solutions for NFTs recovery. In this article, we will try to find some major factors contributing to the NFTs decline:
Restricted to Crypto Niche
Even during its heydays, NFTs’ real use cases were limited to the crypto niche but wielded little power outside of that. In other words, the real potential of NFTs wasn’t maximized. This narrowed traction may also have contributed to sending it down the path of decline. The wider landscape of usage could have…”
To start with, unlike the term ‘cryptocurrencies,’ which indicates that it’s a type of currency, the term ‘NFT’ or ‘Non-Fungible Tokens’ sounds less familiar and more complex. It limited interest to a particular niche. There could have been dozens of better-sounding, more suggestive words that the general public could relate to and adopt.
We have many cases where modifying the marketing strategy influences public psychology and improves product acceptability. A similar strategy can also be used to widen the acceptability and use cases of NFTs. Naturally blending real-world popular brands with NFTs can be helpful, as we saw in the case of Nike. Taking inspiration from such brand-specific campaigns, broader strategies can be planned to serve product/industry-wide objectives like creating awareness, interest, and lifestyle syncing.
Branding and marketing experts can brainstorm on how to expand such strategies to deliver a product/industry-wide impact instead of limiting it to a specific brand.
The crash was overdue
NFTs started hinting at the crash even during 2022, with news reports of celebrity NFT investors experiencing significant value depreciation of their assets; we are talking of double-digit percentage discounts.
As people understood that something was drastically wrong with NFTs, the trading volumes plummeted. What happened next was the obvious cascading of resultant market events triggered by investors’ emotions causing an avalanche of losses. What remains implausible, though, is the lackluster attitude of influential industry authorities to address the situation while it was still manageable.
Adverse Conditions in the Crypto Market
As a standard currency for NFT transactions, cryptocurrencies directly affect NFT market conditions. During the time the NFT market was still struggling with the initial slump, the crypto market also went bearish unexpectedly and remained so for the long term. So, it resulted in a nefarious nexus of market situations that further intensified the NFT value depreciation, eventually contributing to a significant downfall.”
Cryptocurrency is the standard currency for NFT transactions, and hence conditions in the Crypto market inadvertently influence NFTs’ value. During the time the NFT market was still struggling with the initial slump, the crypto market also went bearish. So, it resulted in a nefarious nexus of market situations that further intensified the value depreciation.
Negative market sentiments
As the underlying currency for NFTs, the volatility in the cryptocurrency market not only affected the NFT market but also resulted in negative market sentiments. Amidst the doubts that federal authorities might revoke the legal status of cryptocurrency, many NFT investors started taking stern preventive measures; it was not just a calculated withdrawal, it was the case of exiting the market. So, we can observe a condition that can be called a hotbed for mutually thriving negatives.
As NFT markets are valued in cryptocurrency, the crypto market volatility naturally devalues the NFT assets. It is an even stronger concern for investors who solely aim to skim off their NFT profits by eventually converting their crypto value into fiscal currency. During a long-term bearish period in the Crypto market, it was not just the significant value loss that alarmed them. They also had to battle with concerns about crypto’s sustainability and underlying risks of losing their entire fiscal value.
Too many players congested the market
Enormous value appreciation in NFTs during their heydays prompted a massive surge in market participation. Celebrity collectors joined the bandwagons. Even joke NFTs like Dogecoin were promoted by legendary entrepreneurs. Collectors started hoarding any new NFT without giving it serious thought, which encouraged more creators to participate. At one point in time, the number of creators surpassed collectors, resulting in an unfavorable imbalance in demand and supply. Its impact didn’t materialize immediately due to the massive and unreasonable success of NFTs. As things settled down, the overdue effect burst the NFT market.
It resulted in an influx of creators, eventually causing the situation where the number of creators surpassed investors. The NFT spell took many niches under its effect right from music to painting animations, gaming, and images. It resulted in a volume-over-value situation and caused an unfavorable imbalance in demand and supply, with the former surpassing the latter. It naturally contributed to a steep value depreciation.
Lack of security
Cyberattacks are another reason behind the NFT’s downfall. Being a prosperous and flourishing industry, the NFT market attracted the attention of threat actors. Using sophisticated hacking techniques, cybercriminals managed to steal enormous amounts from NFT. Within a short span of April and June 2022, as many as 143 NFTs got stolen through phishing attacks. A report calculated the estimated global cost of NFT attacks to the tune of $1 billion. As the NFT business flourished at full speed, it needed to tighten its security grip, but a thorough review reveals that there is much to be deserved in that area. Lack of security was a major concern for investors, collectors, and creators. Over a period of time, it discouraged fresh participation and compelled existing participants to control their activities. So, to some extent, the lack of security also played its part in the decline of NFTs. Among others, some NFT thefts attracted headlines. For instance, in March 2022, Ronin, the Axie Infinity blockchain, lost crypto worth $600 million to North Korean Hackers.
Crypto Projects crashing
Unexpected declines in some crypto projects also had an adverse effect on the NFT market. FTX crash, for instance, sharply declined the value of multiple crypto tokens, which in turn affected the prices of NFT projects associated with those tokens. For instance, 6 Rings NFT was launched on Solana. FTX crash resulted in a 25% decline in Solana’s value, which in turn affected the value of 6 Rings, eventually causing a massive 90% loss for its creator, Michael Jordan, the famous NBA star. The cryptocurrency experienced several crashes in succession like TerraUSD, LUNA, and of course, FTX. As NFTs are dependent on cryptocurrency, these crashes inadvertently contributed to the NFT market crash.
For instance, the NBA star Michael Jordan had to register a loss of 90% as his NFT project, 6 Rings, was sharply devalued after the SOL prices declined 25%.
Lack of real-world utility value
While a few brands like Nike launched their NFTs and paved the way for a new ‘digital’ trend, not many NFT brands seemed keen to take things forward. It discouraged users from associating NFTs’ use cases in the real world. With the value depreciating fast, the real-life utility value could have acted as an anchor to sustain the NFTs. In its absence, the downfall became swift. However, the hope is not all gone, as there’s still time to create strategies around increasing real-world brand participation to add real-world viability.
Conclusion
After enjoying a huge success for some time NFT projects are presently struggling to survive the wave of ebb. It is an apt time to review what went wrong. However, it would be too soon to write them off as NFT enthusiasts are still optimistic and the community is going strong. By reviewing the factors behind its decline, we would be in a better condition to determine the course ahead.
By: Jitendra Bhojwani
