2022, the year NFTs fell to earth
Has the NFT bubble popped? As we approach the end of the year, data reveals the marketplace for these unique digital assets is down by almost every metric.
Yahoo Finance UK looks back over 2022 a year when digital collectibles came back down to earth.
There has been a haemorrhaging of value in the NFT marketplace throughout 2022, a loss that could not be reversed despite tech corporations like Meta (META) developing a digital collectible function for Instagram, and Reddit introducing its Collectible Avatar NFT range.
The number of active NFT wallet addresses declined throughout the year, leading to a trade volume slump on the OpenSea NFT marketplace, which is seen as the Amazon (AMZN) of NFTs, according to data from blockchain-tracking software DappRadar.
OpenSea’s best trading day of this year, 1 May, saw a record $2.7bn (2.2bn) in NFT transactions, but on the worst performing day a few months later on 28 August, it recorded just $9.34m in trade volume.
OpenSea said: “We’re playing the long game because we see what’s possible, so we’re not that concerned about short-term volatility.
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“We always expected frothiness, hype, and deflation as the community and use cases evolve, the tech gets more sophisticated, and creators figure out how to build more utility into their projects.”
As the year rolled on, the entire cryptocurrency market began to buckle under the strain of a grim macroeconomic environment led by monetary tightening by the US Federal Reserve, and uncertainty amongst institutional and retail investors.
In October, blockchain incubator and consultancy firm Consensys issued a report entitled The State of NFT Markets 2022 which said: “The market for non-fungible tokens (NFTs) has had a rough few months alongside this years wider drop in asset prices.
“A distressed macro environment has significantly reduced on-chain activity across the crypto ecosystem, bringing down prices across the board from their 2020-21 highs as investors move down the risk curve and unwind positions.”
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The biggest loser in the NFT sector this year has been Arts & Collectibles which the Consensys report cited as being in continual decline since 21 August 2022.
The FTX cryptocurrency exchange collapsed in early November, coinciding with a Google (GOOGL) report that showed searches for NFTs dropped by 88% in less than a year.
Between January and September 2022, NFT trading volume collapsed by 97%, from $17bn in value to just $466m, according to Bloomberg.
From March through to June, the combined NFT market cap fell by 40%, while trading volume collapsed by 66%, suffering alongside the general collapse of the cryptocurrency market after the fall Terra’s UST algorithmic stablecoin.
Read more: 2022: Year in review
As the crypto market retracted, hunkering down for a prolonged crypto winter, NFT prices and transactions have fallen off a cliff, with the holders of high value NFTs, such as Bored Ape Yacht Club, preferring to hold their asset for a possible future lift in the market and renewed bullish sentiment.
NFT highlights 2022
But, there were some positive highlights from 2022, which otherwise saw a rollercoaster downward trajectory of the entire NFT market.
March: Instagram NFT announcement
At the SXSW festival in Austin Texas in 2022, Mark Zuckerberg, CEO of Facebook owner Meta, took to the stage to announce that his company was “working on bringing NFTs to Instagram in the near term”.
However, he added that he was “not ready to kind of announce exactly what thats going to be today”.
The announcement raised questions over which blockchain the NFTs will be deployed on, what payment channel will be used to purchase them, and whether Instagram will become a new marketplace for NFTs, in direct competition with Opensea, Rarity and Nifty Gateway.
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Many artists, musicians and fashion designers use Instagram as a platform to showcase their creations.
If Meta allowed each image in a user’s Instagram page to be monetised as an NFT, it would become a major disruptor in a market that is currently controlled by OpenSea, which operates using the Ethereum (ETH-USD) blockchain.
The announcement was followed up with an Instagram statement in August about a collaboration with Coinbase and Dapper labs to create wallets for users to store funds from sales and for purchases.
It said: “We now support wallet connections with the Coinbase Wallet and Dapper, as well as the ability to post digital collectibles minted on the Flow blockchain.
July: Reddit Collectible Avatars
In July 2022, Reddit introduced Collectible Avatars as an extension of the platforms rebuilt Avatar Builder system.
Collectible Avatars are limited-edition digital collectibles made by independent artists that confer unique benefits for their holders. According to Reddit, Avatar holders can get “special treatment on their posts and can choose customisable wearables”.
The initial 31 special-edition Avatar series sold out. Reddit users purchased them through the Reddit Collectible Avatars Shop using dollars. They are stored on Polygon-based digital wallets.
December: Donald Trump NFTs sell out
A surprise end of year boost for the NFT marketplace came in December with Donald Trump’s NFT Trading Cards selling out and raising over $5m.
In early December, the former president posted on the Truth Social platform: “My official Donald Trump Digital Trading Card collection is here!”
Trump’s collection consists of 45,000 NFTs on the Polygon blockchain, priced at $99 each.
Though the NFTs were widely mocked by both Trump supporters and detractors alike, all 45,000 sold out in around 12 hours, according to OpenSea data.
What are NFTs?
Non-Fungible Tokens (NFTs) are a type of digital asset that are unique and non-interchangeable.
They are used in a variety of ways and can be used to represent anything from artwork, to digital collectibles, to digital tickets.
The first known NFT, Quantum, was created by Kevin McCoy and Anil Dash in May 2014. It consists of a video clip made by McCoy’s wife, Jennifer.
However, 2021 saw a huge explosion and surge in NFT supply and demand, with a market capitalisation rising to over $40bn.
2021 was the year the NFT market swelled and evolved into an array of digital assets with zero use-case. A year when digital images of cartoon apes sold for millions each, with Bored Ape Yacht Club and CryptoPunks sales combining to peak over $17bn.
This was the year of NFT celebrity endorsement from the likes of Paris Hilton and Snoop Dog, with the high-water mark being the Christies sale of Beeples Everydays: the First 5000 Days NFT for $69m in March of that year.
When it comes to market volatility, the prices of NFTs can fluctuate due to the volatility of the cryptocurrency markets.
This is because many NFTs are based on the Ethereum blockchain and are therefore subject to the same market forces as other cryptocurrencies.
In addition, the value of an NFT can be affected by the changing sentiment of the market. If people are feeling bearish about the NFT market, it can cause prices to drop.
Another potential issue is lack of liquidity. As the NFT market is still relatively new, there is not yet a large enough market to provide liquidity for NFTs. This means that it can be difficult to find buyers for NFTs and the lack of liquidity can lead to a decrease in value.
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The unique innovation provided by NFTs was to take work created by artists and turn them into a one-off digital asset, that could be exchanged and stored in digital wallets, online exchanges and deployed in metaverse landscapes.
One of the most profitable use cases for NFTs is in the digital collectibles space.
Digital collectibles, such as CryptoKitties, are unique digital assets that can be purchased, sold, and traded.
By utilising NFTs, users are able to prove ownership and authenticity of their collectibles.
This has allowed for a new form of digital asset trading, with users able to purchase, sell, and trade their collectibles without having to worry about counterfeiting.
NFTs can also be used in the gaming space to represent in-game items, such as weapons, armour, and other digital assets.
What lies ahead in 2023?
Despite the potential for NFTs to lose value, they are still seen as a viable investment option. The potential applications of the underlying technology behind NFTs are almost limitless, with new uses being discovered every day.
The key to purchasing an NFT is to do rigorous research and invest responsibly.
A study by 360 Research Reports suggests that the global NFT market size is projected to reach $73bn by 2028, from $15bn in 2021.
As more and more people migrate to online spaces and life becomes more virtual, NFTs may indeed have staying power.
