NFTs are in their first crypto winter

What happened

Although NFTs have lasted longer than regular cryptocurrencies earlier this year, market participation has fallen dramatically, and even blue chip assets and collections such as the Bored Ape Yacht Club have seen their prices crash.

Although it may have been unavoidable, some investors hoped or believed that NFTs could do better for a few reasons:

1. They represent another segment of the market that is made up of committed community members who often add sentimental value to the NFTs they have. Much of what gives value to NFTs is the sense of community and the ability of NFT owners to engage with other holders in the collection.
2. Unlike assets such as bitcoin and ether, institutional money has not yet flowed into space. Although they were celebrated for driving the price of bitcoin up to almost $ 70,000 last year, mainstream investors have also led to crypto forming a close correlation with risk assets such as technology stocks.
3. Buying an NFT also comes with more friction than buying bitcoin on a prominent exchange. Most assets are priced in other digital assets, such as ETH or SOL, not fiat, which requires potential buyers to acquire these assets first.

Now, as the NFT market prepares to go through its first bearish cycle, investors are trying to figure out how to perform in the second half of the year.

Wider context

Although NFTs are sometimes dismissed as easily-replicable digital images, they convey a sense of community and belonging that goes back to the early days of bitcoin. In the profile picture (PFP) avatar segment of the market, which makes up most of the value of the NFT space, owners post their NFTs on their social media pages as the face of their digital identity. In addition, relative illiquidity and the social pressure of supporting a community by linking a member’s online identity to her NFT portfolio can contribute to a long-term holding mentality.

Some NFT holders may also have access rights to private chat channels, live tickets and virtual events, and other forms of tools. These rights are authenticated through services such as Collab Land which are directly integrated with Discord (the primary communication app used by the NFT community) to verify that a user has the required NFT in their Web3 wallet, such as Metamask or Rainbow Wallet.

Nevertheless, weakness in the stock market has had a ripple effect on the crypto markets, mainly induced by the Fed’s emphasis on lowering interest rates and reducing the size of the balance sheet to combat historically high inflation.

The crypto markets have lost $ 2 trillion in value since the peak in 2021 in November. Although assets with small capitalizations were hardest hit, with some losing 99% of their value, cryptocurrencies such as bitcoin and ether were not immune, losing 74% and 79% from top to bottom, respectively. The total market value of crypto fell from $ 2.97 trillion to a recent low of $ 792 billion, representing a decline of 73%.

Key figure

The market value of all collections listed on the NFTGo data aggregation platform fell 40% from $ 37.2 billion to $ 22.2 billion from top to bottom. Daily trading volume among these collections has fallen sharply by 95% from the peak of ~ $ 800 billion in January to ~ $ 40 billion now.

Prospects and implications

Even among the top performers of all NFT collections, the floor price of these collections has declined to a somewhat greater extent than ETH (-79%). This relative underperformance suggests that NFTs act as a risky high-beta game in the crypto markets, which transitions to the upside and underperforms to the downside. Of course, it was the opposite throughout the bullish period that just ended.

While Bitcoin is currently undergoing its third major market cycle, NFTs are a relatively new segment of the market going through its first such period. Nevertheless, it seems that the path for both classes in crypto will depend on how the broader market performs. As things stand with the current tightening environment and growing fears of a recession, it is difficult to imagine a significant rise before 2023, unless the Fed changes its course significantly.

Decision points

Given the challenging environment, investors should be wary of buying NFTs that are relatively more liquid and supported by established teams and developers. One calculation worth paying special attention to is trading volume. Although it has been anemic recently throughout the sector, an increase in volume may signal greater interest and attention from investors and users as they enter the area.

In addition, investors who denominate their portfolios in the original crypto asset and place less emphasis on the currency fluctuations of the underlying ETH, can more easily cope with the volatility in the NFT markets. Top collections (as determined by floor price, volume and community size) have been more likely to retain their value in ETH terms, and thus are better positioned to increase in value when the market turns bullish.

From top to bottom, Bored Ape Yacht Club (BAYC) is down 52% when denominated in ETH, but down 80% when denominated in USD, Mutant Ape Yacht Club (MAYC) is down 65% in ETH, but down 86% in USD, and Moonbirds are down 58% in ETH, but down 85% in USD.