Regulatory scrutiny can test NFT popularity

It can be equivalent to a digital fire sale.

Non-fungible tokens (NFTs) have seen volatility similar to that of bitcoin and other digital assets.

Back in 2021, NFT trading volume reached nearly $25 billion. And the increase continued into 2022, with the first few months of that year recording billions of dollars in sales volume — more than $3 billion in May, for example, as reported of the Decrypt website and via data from DappRadar.

But then, towards the end of the year, when FTX collapsed and the exchanges were closed, the volume decreased and by the end of the year the volumes fell below 1 billion dollars. Last year it still ended up with a year-end of $24.7 billion, slightly lower than the year before, but that was because of the tidal wave of demand that marked the beginning months of the year.

NFTs, of course, make a name for themselves and money by being unique – assets cannot be duplicated, and can seemingly monetize pretty much anything from art to tweets to lines of code to games. Among the marquee NFTs: Beeple’s $69 million raised from an NFT digital art collage.

So far into 2023, we have seen a bit of an upturn: DappRadar reports that NFT the market recorded $946 million in trade value in January, up 38% from December and reaching levels not seen since the summer. The latest tailwind is at least partially related to the Bored Ape Yacht Club NFT collection.

Three Arrows Liquidation a litmus test?

Market sentiment may get a test in the coming weeks, with a pending sale of NFTs as part of the ongoing liquidation of bankrupt crypto hedge funds Three Arrows Capital, which collapsed last summer.

In a note dated 22 February, the liquidators said that “certain” NFTs would be sold within weeks of the letter. But the letter from Teneo, which is based in the British Virgin Islands and is overseeing the liquidation, was quick to note that the sale is “not related to the list of NFTs informally referred to as the ‘Starry Night Portfolio’.” That portfolio was built by Starry Night Capital, in tandem between 3AC and NFT Collector Vincent Van Dough. About what is on offer in the liquidation: Various media reports claim that NFTs being sold include CryptoPunks and Bored Ape Yacht Club inventory.

We note that the liquidation comes as February’s NFT trading data has fallen from January — where sales volume is down 27% per media report. If the overall demand for NFTs declines, and a liquidation of (some) of 3AC’s NFTs proves to be muted, there could be further pressure on the markets in general, at least in the short term.

Meanwhile, as with so many other crypto holdings, there is a bit of an existential debate going on with NFTs. As mentioned in this spacehas the Securities and Exchange Commission (SEC) focused on whether NFTs are securities.

Over the past few months, the SEC has issued requests for information on various NFT projects.

And in a recent ruling, a judge said a case against Dapper Labs could move forward. The judge ruled that The NFTs can actually be securities.

In an environment where trading volumes are volatile, where laws/regulations of what the NFTs still have yet to break out – a shoe that has yet to drop, so to speak – it may be that 2021’s heyday looks long ago and far away.