What Is The Nft Bubble?

By CNBCTV18.com  IST (Updated)

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Let’s understand what this term means and its effect on the NFT industry.

NFTs burst onto the scene a couple of years ago and immediately shot into popularity. Within no time, retail investors, celebrities and the world’s biggest brands began hopping onto the NFT bandwagon.

As such, the prices of these digital assets also skyrocketed, with some selling for millions of dollars apiece. However, as popularity and sales increased, the term ‘NFT bubble’ started doing the rounds, especially amongst critics.

What is the NFT bubble?

In the world of investments, a bubble is an economic phenomenon characterized by the rapid increase in the market value or price of an asset or asset class. These exorbitant prices are driven by massive demand and fuelled by speculation, causing the market value of an asset to overshoot its intrinsic value.

Of course, after a while, when the demand fizzles out, people realize the actual value of these assets, and prices usually begin to deflate rapidly. This sharp decrease in value is referred to as a “crash” or a “bubble burst.”

In the case of NFTs, people were driven by FOMO. Everyone wanted to get their hands on the latest NFTs before they sold out. The hope was to benefit from inflated price valuations in the future.

This massive demand sent the price of most NFTs skyrocketing. Even the most unbelievable NFTs that lacked utility and usefulness started selling for thousands of dollars.

Building the NFT bubble

NFTs have been around for a while, almost as early as 2014. However, it was only in 2021 when these digital assets exploded. The trading volume for NFTs hit USD 17.6 billion in 2021, representing a 21,000 percent increase from the previous year, according to a report from Nonfungible.com.

Projects like CryptoPunks, which were developed in 2017 and sold for just a few dollars, began demanding thousands of dollars apiece in 2021. Judging by this success, several NFT projects poured onto the scene, most of which found instant success.

Beeple’s NFT ‘Everydays: The first 5,000 days’ sold for USD 69.3 million. Then there was the Bored Ape Yacht Club, a collection of 10,000 NFTs, each going for hundreds of thousands of dollars, with buyers including some of the world’s top celebrities.

Even the most ludicrous NFTs began demanding outrageous price tags. For instance, an image of Jack Dorsey’s first tweet turned into an NFT sold for USD 2.9 million. On the other hand, a 22-year-old Indonesian student sold 1,000 deadpan selfies of himself as NFTs on OpenSea, each selling for thousands of dollars and earning a cool million dollars almost overnight.

Judging by these unwarranted prices and purchasing, many critics believed that the NFT industry had formed a bubble, which was bound to burst at some point.

Has the NFT bubble burst?

There are three signs that an economic bubble has burst: falling prices, decreased media coverage and the onset of massive selloffs. The first condition seems to have happened already, with NFT sales tanking at the start of this year.

In Jan 2022, total NFT sales on OpenSea, one of the largest NFT trading platforms in the world, totalled nearly USD 4.85 billion. However, this figure began to tail-off ever since then. In February, it was USD 3.75 billion, dropping to USD 2.25 billion in  March.

And OpenSea isn’t alone; the overall sales for NFTs have also decreased significantly. The third quarter of 2022 saw USD 3.4 billion in NFT sales, down from USD 12.5 billion in the first quarter of the year, according to a report by DappRadar.

Media coverage has also declined, along with investor interest. Data from Google Trends backs this notion. According to search term reports, NFTs reached their peak popularity at the start of the year, touching a score of 100 (the max score) towards the end of Jan.

However, the popularity of NFTs has declined since then, reaching a score of 11 between Sept 25 and Oct 1. Around the same time, the term ‘Sell NFT’ shot up by 83 percent in the Google search interest index, an indicator that users are looking to get rid of their NFTs.

Judging by all these factors, one must assume that the NFT bubble has indeed burst or is about to burst. Most market experts were also in line with this view. “The bubble has burst, or still has to burst,” said Pedro Herrera in an article with The Globe and Mail in August.

Herrera is the head of research at DappRadar, and according to him, “90 to 95 percent of the

Conclusion

Even if the NFT bubble bursts, these digital assets are here to stay. They are a big part of the metaverse and web3 play-to-earn gaming platforms, and these two industries will be a significant part of our lives in the future.

In fact, a report by Gartner suggests that around 25 percent of the world’s population will spend more than an hour every day in the metaverse by 2026.

The burst of the NFT bubble could also see a transition from popularity to utility as the driving force behind a crypto project. Already, several projects are looking to add value to their NFT collection by offering some real-world utility to their workings.

Whether it is social NFTs that reward content creators and their fans or POAP NFTs that provide exclusive privileges to their holders, the NFT industry will evolve to meet changing market dynamics.


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