The excitement for non-fungible tokens (NFTs) took the cryptocurrency industry by storm in 2021, spawning an incredible number of NFT projects. The majority of these collections are now experiencing their first bear market; has the bubble popped and is the hype over?
Similar to the "ICO craze" of 2017/18, the vast majority of NFT projects pulled back into their own bear markets early on in the year. 2021 ended with low liquidity, low volume, and floor prices that were approaching zero for many collections. However, the so-called "blue chip" NFTs were able to maintain their strong communities, build additional partnerships, and offer potential buyers incentives to get involved with the project. An overview of where the markets stand.
Different behavior than fungible tokens
In financial and cryptocurrency markets, people usually talk about bear or bull markets. A bear market refers to sustained price declines, while prices in a bull market are generally rising. So when Bitcoin and Ether hit their highs in November 2021, followed by consistent price and volume declines since then, they officially entered a bear market. The NFT markets were hardly phased. Rising floor prices and NFT trading volume indicated a decoupling from the market cycles of fungible cryptocurrencies.
Many market participants attribute the mysterious price behavior to the different end users that NFTs appeal to. Because cryptocurrencies have financial implications by default, the communities around fungible tokens such as Bitcoin and Ether are usually quite similar. Tradeable profile pictures and collectibles in the form of NFTs were able to reach a target audience beyond the financial-savvy investors. With less overlap in these communities, the prices were relatively resilient.
"Blue chips" remain strong
At the beginning of the bear market, some established NFT collections were able to hold their dollar value and even gained ground in Ether. The currently most popular project, the Bored Ape Yacht Club (BAYC), one the one hand only saw a moderate price decline, on the other hand the number of owners has constantly continued to rise. With a 10,000 piece limited series, reaching 6,462 owners is an indication of good distribution.
However, even the "blue chips" of the industry had to tackle some losses. The prices measured in Ether often disguise bigger declines that should be seen in relation to Ether's price movements. For example, while the floor price of a Bored Ape declined from 150 to 95 Ether (-37%), in US dollars, the collection is about 67% away from its all-time high. Similar fates befell the once coveted Crypto Punks (-80%), Meebits (-63%), and Azukis (-82%); comparable to the declines of various altcoins.
NFTs: here to stay?
The state of the NFT markets bears strong resemblance to the Initial Coin Offerings (ICOs) of the 2017/18 era. The advantages of the underlying technology are undisputed. From tokenized artworks to digital identities and NFT music tracks, the use cases for non-fungible tokens are diverse. However, throughout the past year, it has also become apparent that the market, like other assets, overheated and sustainability was often left by the wayside.
Speculation took over as dozens of new projects were created daily, diluting the rest of the market, while scammers raked in millions. Fundamentals became irrelevant and the only goal of acquiring an NFT was to sell it at a higher price (als known as flipping). In a general crypto winter, these practices will slowly fade away. Just as some projects from the ICO craze delivered solid products years later (Aave, Filecoin, and Chainlink, to name a few), there will be survivors of the first NFT bear market. Whether it is actually the most traded collections today remains to be seen.
