Has the NFT art bubble finally burst? Not yet, new data suggests

Last month, the The Wall Street Journal reported that sales of NFTs were “flatlining,” citing data from NonFungible, a data analytics company that covers the industry. At first glance, the numbers look stark: active NFT wallets appear to have fallen 88% – from 119,000 to 14,000 – since last September, and individual sales have fallen from a daily average of 225,000 to 19,000, a steep 92% . Even worse, buyers are outnumbered by sellers by something like five to one.

A collapse on this scale would be a serious blow to an industry that by 2021 saw over $17 billion change hands, fueling the hopes and dreams of thousands of artists who saw the technology as a means to finally cash in on their otherwise infinitely reproducible digital art. It would also be a windfall for collectors hoping to resell for a quick buck: The Wall Street Journal recounts the travails of one Sina Estavi, who bought a screenshot of a Jack Dorsey tweet for $2.9 million in March 2021, but can no longer attract a bid above $14,000. (He perseveres, though – good for him.)

The problem is that this data does not tell the whole story. For a start, as NonFungible pointed out, the numbers used were from the Q1 report, and we’re now approaching Q2; things have changed, not least with a number of new, lucrative collections such as Moonbirds and Otherside. (NonFungible also insisted that the numbers were “conservative”.)

More relevantly, NFTs are a vast and diverse asset class that defy attempts to explain their value in terms of a single set of market principles. They sometimes behave like assets in the traditional art market, with one-offs and collections produced by popular artists going for exorbitant sums based on a fierce combination of perceived prestige and belief in an even more exorbitant resale price.

Exclusive privilege

But then there are the newer groupings of NFTs: “profile picture” avatars, like Bored Apes, that form part of collections that grant some sort of exclusive privileges to the holder such as access to events, intellectual property, more tokens and message boards. These behave more like ordinary stocks, or a digital asset like Bitcoin or Ethereum.

“The value of the chips is derived quite differently,” says Louisa Choe, an analyst at Nansen, a data firm that provides a more complex view of the NFT markets. “Begs like Bored Ape Yacht Club, Doodles and Azuki are ‘social NFTs’ – their core value is the identity they offer adopters.” On the other hand, she says, the value of one-off works is “derived from the artists’ popularity and recognition”.

Understanding this distinction results in a more nuanced appreciation of the market. Looking at the data, Choe observes that since April there has actually been a boost in NFT sales, as evidenced by the increase in the ratio of wallet buys to wallet sales. (The The Wall Street Journal didn’t make this distinction.) While there has been some selling of cheaper tokens, she says, the data suggests that sellers are not leaving the market, but simply moving from one type of NFT — the riskier “drops” of popular artists — to better established collections that look like a safer bet. Choe says these social NFTs now have an 83% share of the NFT market; that’s why she calls them “blue chips”. That’s not unlike the moves seen in the broader technology markets, which have been affected by higher interest rates.

Sam Williams, CEO of decentralized NFT database Arweave, says pools look safer for investors because they are able to draw in more liquidity – meaning more potential buyers and sellers. One-off works generate huge amounts of buzz in the hope of attracting new buyers looking for a profitable resale, but over time this buzz will subside as the new fashion catches up with it – unless the work is a worldwide masterpiece or has some historical significance . That’s what makes these works “non-fungible”: each is unique and there is no equivalent you can exchange it for. If the buzz fades, you’ll probably never find a buyer and you’ll be stuck with an attractive waste of money (unless you just like the art!) It also makes reliable data hard to find: for example, how is a digital work of either buyers or sellers valued at all? The proliferation of private, proprietary auction houses and the phenomenon of laundry trading, where owners trade with themselves, do not help either.

NFT collectibles, on the other hand, behave almost like regular assets. Bored Apes, for example, musters large, devoted communities of owners of these mostly interchangeable primates, guaranteeing a degree of liquidity. “Those collections where there is a large community and many tokens have a slightly more ‘fungible’ market structure,” says Williams. He explains that this is why the value of NFT collections is often determined by a “floor price” – that is, the cheapest available of a given set. “People tend to be willing to buy the cheapest is, as long as they ‘have a boring monkey,'” he says. (This is also why very few holders even pretend to care about the quality or, say, the dialectical meaning of the art.)

All this means that The Wall Street Journal was not exactly wrong to note a decline in the value of some NFTs. But in reality, punters have simply traded one casino for another, moving from the auction house to the trading floor.