Non-fungible tokens (NFTs) have been in the spotlight for most of this market cycle. NFTs are non-fungible, meaning they cannot be interchanged with everyone being unique (unlike fiat, gold, or cryptocurrency) and are a token, using the blockchain to show proof of ownership, with the majority being on the Ethereum blockchain. NFTs can take multiple forms, but currently, collections are mainstream. The popular collection, CryptoPunks has amassed over 568,800 Ethereum (over 2,378,512,100 USD) in volume since its launch with even Visa Inc. purchasing a Punk on the 23rd of August 2021. This volume has trickled down into other projects like Axie Infinity with a percentage increase of 120,000% over the last year, and Bored Ape Yacht Club displaying significant success for any early adopter in the market. However, now, optimism isn’t as commonplace, with volumes across the market significantly lower than that of two months ago along with floor prices falling, especially in the short-term. A few major factors are causing this downturn such as Ethereum related issues, hacking, and over-saturation.
A vast majority of NFT projects are built on the Ethereum network, so the correlation is obvious between the two regarding both floor price and volume. Recently another project in the form of the Memecoin Shiba Inu (ticker $SHIB) has caused huge, sustained surges in the gas fees on the network. UniSwap, a decentralised exchange, has been the main trading location for SHIB activity. Between the 26th and 28th of October, gas fees stayed above 200 gwei (short for gigawei, a denomination of Ethereum) for most of the period, drying up transactions for NFTs due to the lack of desire from collectables to the high gas. Moreover, Ethereum has rallied over 30% since the beginning of September 2021. Rising Ethereum prices historically correlate with declines in NFT volume, demonstrated by the comparison between the USD daily volume on OpenSea on the 28th of August compared to the 29th of October 322 million, compared to 51.07 million USD in ETH. This stark fall seeks to show some correlation, especially with the Shiba Inu and meme coin hype in the cryptocurrency space, yet Ethereum cannot be solely blamed.
Despite innovative progress being made in NFTs through Web 3.0, video gaming and AI, this does not represent the full market. Similar to the early stages of Cryptocurrency, the market is saturated with many copycats and low-effort projects, with over-promises and under-deliveries. CryptoPunks, being the dominant project of the space has led to numerous clones, such as Greyscale, Fast-food, and 3D punks being a few of the plethora of projects trying to profit from the popularity of the LarvaLabs creation. Most of these copycat projects now have near-zero volume, with any collectors left near illiquid, even if the floor price is high. Moreover, the “10k” projects are another example of NFT collections that are created for initial publicity rather than longevity. However, even with the potential of a future, collectors’ caution is still advisory, with “rug pulls” and false promises being a reality for any NFT project. An example is HashDemons, a project which had promised a long roadmap with the likes of an ‘online battle arena’ but ended with the leaders disappearing without a trace and collectors empty-handed with their Ethereum lost. This over-saturation has partially led to burnout among investors, with mistrust and uncertainty with the legitimacy of many projects.
Another reason for mistrust is the very recent hacks, exploits, and shadiness surrounding NFT mints and airdrops. A mint is a primary market where the community “mints” before getting sold and listed on secondary markets such as OpenSea. Unfortunately, some NFT projects, such as BearX and CreatureToadz were both viable to hack on Discord. This then led the hackers to post links leading to a site where it was disguised as the mint for the NFT resulting in large amounts of ETH being stolen. Luckily for CreatureToadz, the hacker returned the Ethereum, but this is not a unique scenario in the NFT market and is both a reason to be worried and a sign of the infancy of the market. Moreover, another NFT project MekaVerse, suffered a controversy in the form of potential inside knowledge of the metadata before the NFT reveal. This led to the drop of the floor price of the Mekas from over 8 ETH to just 0.9 ETH, a huge loss for anyone involved.
Despite the current bearish trend for the NFT market, it is not a reason to be completely pessimistic. With events such as a Coinbase market and the potential integration of NFT wallets on Twitter, the future of NFTs can still be viewed in an optimistic light. The market being premature is therefore a reason to be cautious but not a reason to ignore and shun the potential of NFTs.
By: Samuel Buchan
Sector Head: Sophia Li