June 02, 2023 - 14 min read
It’s no secret– NFT prices have fallen significantly in the last year– leaving many wondering why the non-fungible token market crashed, when it will go back up, and why it crashed in the first place. We can identify several significant reasons for the NFT crash, including the psychology of economic bubbles, NFT wash trading, the volatility of the broader crypto market, and overall macroeconomic conditions. Here’s everything you need to know.
However, let’s start at the beginning. The NFT industry began with the creation of the Ethereum ERC-721 token standard in 2017 and reached its highest peak in the spring of 2022, but, as of late, prices and trading volumes had fallen drastically.
Many famous NFTs sold during the height of the market, including Beeple’s $61 million NFT sale, as well as “The Currency,” an NFT collection by celebrated artist Damien Hirst, which reached $89 million in sales. However, individual NFTs can only tell us so much about the market– with NFT trading volumes and floor prices generally being significantly more accurate metrics of market sentiment.
For example, from August 2021 to April 2022, weekly trading volumes for non-fungible tokens regularly exceeded $750 million, with volumes soaring to more than $1.5 billion during peak weeks. In contrast, from June 2022 to May 2022, weekly trading volumes did not exceed $277 million for any one week.
When we look at individual NFT prices, a similar trend presents itself. For instance, the average floor price of a Bored Ape Yacht Club NFT sat at its all-time high of more than $420,000 at the end of April 2022 but, as of May 2023, had declined to just over $80,000, a 340% drop in just a bit over one year. Plus, according to data from Chainalysis, the average price of NFT token sales fell by a staggering 92% from May 2022 to February 2023, from $3,894 to $293.
Bored Ape Yacht Club (BAYC) price history and peak data (Source: CoinGecko).
Other popular collections, like CryptoPunks and Decentraland NFTs, were also not immune from the crash. For instance, the average floor price of a CryptoPunk NFT was more than $240,000 in early April 2022 but had fallen to slightly over $52,000 by mid-June of that year, and, as of May 2023, floor prices sit just above $80,000, still a significant price reduction from mid-2022. In addition, the average Decentraland NFT went from $3,820 in June 2022 to only $103 in November 2022, and, as of May 2023, sat at $1,166.
We should note that, In addition to this major crash, the market also experienced a minor crash in between these price peaks, starting in February 2022 and reaching a “smaller” bottom in March of that year. However, this will not be the main focus of this analysis.
NFT trading volume by chain, Jan. 2018- May 2023 (Source: The Block).
In this article, we’ll discuss how the NFT market has crashed over the last year or so, the reasons for the NFT crash, and the broader implications for the industry over the coming months and years.
In economics and finance, a financial bubble occurs when the price of an asset rises quickly and unsustainably. Bubbles are often associated with hype, euphoria, speculation, and wild predictions, particularly among a small group of wealthy speculators, which end up convincing a larger group of individuals to invest in the asset, regardless of its long-term value. Since NFTs rose so quickly in value and were endorsed by a wide array of celebrities, many investors honestly believed that NFTs would keep rising in value no matter what. Economic bubbles have been a common theme throughout history, with notable mentions including the Dutch “tulip frenzy,” the British “South Sea Bubble,” and speculative mortgage-backed security investing in the lead-up to the 2008 financial collapse.
In addition to the historical trend of asset bubbles, much like art and sneakers, high-value NFTs carry with them a certain mystique and prestige. Many crypto influencers (and ordinary crypto enthusiasts) who had purchased BAYC or CryptoPunks NFTs proudly displayed them as their Twitter profile pictures PFPs, perhaps as a display of wealth, like one would proudly drive up to work in a new BMW.
Wash trading is one of the major factors that lead to the 2022 NFT bubble and has consistently contributed to overall volatility in the crypto and NFT markets. Wash trading occurs when an individual or entity buys an asset, like an NFT, crypto, or stock in a company, then re-sells it to themselves, typically to artificially inflate the market price of the asset, which they can sell to a new buyer.
Wash trading is illegal when it comes to securities (i.e. stocks, bonds, ETFs), but no such protections exist for the crypto or NFT markets. Therefore, it can safely be said that NFTs would never have reached anywhere close to their peak prices without significant wash trading. In fact, a study conducted by Dune Analytics found that, in January 2022, more than 80% of all NFT trading volume was wash trading– and that wash trading can be more extreme than you might think.
NFT sellers by number of sales to self-financed address, 2021 (Source: Chainalsyis).
In one case, Chainalsyis found that one extremely prolific NFT trader purchased NFTs and sent them to at least 830 “self-financed” addresses. Wash trading may inflate prices temporarily, but since overall (longer-term) market sentiment does not support the inflated price, the prices of wash-traded NFTs often “fall back to Earth” within weeks or months of their initial sale to victims. While most wash traders are actually unprofitable, those that do profit may earn millions of dollars from their exploits, and since there is no legal way to prevent wash trading, this problem will likely continue to future NFT price instability (and more bubbles) in the future. While it’s true that NFT marketplaces can discourage this type of activity with improved security measures, this is likely to only be a band-aid on a persistent industry issue.
It’s no surprise that the crypto and NFT markets are tightly intertwined, and while crypto and NFT prices don’t follow each other on a 1:1 basis, the crypto market certainly has a major impact on NFTs. It’s common knowledge that the crypto market peaked in November 2021, with Bitcoin hitting nearly $70,000 and the entire crypto market cap sitting at more than $3 trillion— but how did this impact NFT prices?
Total crypto market cap, 2014- May 2023 (Source: CoinMarketCap).
While the crypto market cap had fallen significantly to $1.632 trillion by late January 2022, in fact, this did not negatively impact NFT prices– at least right away. In fact, overall weekly NFT trading volume spiked to $1.6 billion during the last week of January 2022. Plus, BAYC floor prices, which we can continue to use as a barometer of overall NFT prices, reached a peak of $118,000, which wouldn’t be exceeded until their previously mentioned all-time high of $153,000 at the end of April 2022. By that time, the crypto market had made a slight rebound to $2.134 trillion by March 2022, which directly preceded the all-time NFT price peak.
This seems to mean that NFTs prices are heavily related to crypto prices, but there may be a multi-month lag between a fall (or rise) in crypto prices and a subsequent fall or rise in NFT prices. This could be because NFTs have sentimental value beyond cryptocurrencies, so investors may hold onto them longer, though it’s difficult to truly say.
Of course, beyond simple price fluctuations, certain events in the crypto industry have also had a potentially negative impact on NFT prices. For instance, the November 2022 crash of FTX did lead to a minor decline in crypto and NFT prices. Of course, other failed crypto companies and projects, like the failure of the major crypto lender Celcius, did not help prices or overall NFT market sentiment.
While there are certainly a variety of specific, NFT-related, and crypto-related factors that led to the 2022 NFT crash and could contribute to future crashes, neither crypto nor NFTs are free from the influence of broader market forces. During 2020 and through part of 2021 (the height of the COVID-19 pandemic), many Americans (as well as individuals in other countries) were provided significant payments to supplement their income, leading to a significant increase in consumer purchasing power, propping up the e-commerce industry and giving ordinary people extra money to invest in riskier assets like crypto and NFTs.
In fact, at least in the United States, data from the Federal Reserve suggests that households accumulated about $2.3 trillion in savings in 2020 and through the summer of 2021, beyond what they would have saved during regular market conditions. However, by mid-2022, savings rates had dropped significantly, meaning that the average person had far less disposable income– and eventually, that drop led to significant changes in consumer behavior.
In addition to fluctuations in savings rates and their impact on regular consumers, partially due to artificially low interest rates, the stock market rose significantly during 2021. This significantly added to the net worth of those with significant investment portfolios. For example, from March 2020 to the end of December of 2021, the S&P 500 had risen an incredible 206%. However, from end of year 2021 to June 2022, the S&P lost 23% of those gains.
Of course, we also can’t rule out record-high global inflation, which also put a significant financial strain on individuals, many of which likely sold their NFTs as a result of rising consumer prices. For example, inflation was a walloping 8.3% in April 2022, directly prior to the collapse of the NFT market. Inflation peaked at 9.1% in June 2022, during which the NFT market continue to crash before leveling out in July.
In general, in bull markets, individuals and institutions are far more likely to invest in high-risk assets, like crypto and NFTs. However, the opposite is true in conditions of economic scarcity. When government stimulus payments stopped, individual and household savings, as well as investment portfolios began to slowly drop– and, when trying to de-risk portfolios, high-risk NFTs are often the first thing that gets sold. Therefore, we can safely state that overall economic conditions also lead to the 2022 NFT crash.
Another potential reason for the volatility of the NFT market and the NFT crash is the economic concentration of NFT value in just a few collections. For example, according to data from CoinMarketCap and CoinGecko, as of May 2023, the Mutant Ape Yacht Club had a market cap of $834 million, while the overall market cap of all reported NFT collections was $3.044 billion. This means that the BAYC alone represented around 27% of the market cap of all NFTs. The Bored Ape Yacht Club isn’t far behind, with a $381 million market cap– meaning that Yuga Labs’ NFTs represent around 40% of the current NFT market cap.
CoinCodex reports a different set of data, instead estimating the overall NFT market cap at $9.24 billion and the BAYC market cap at $1.26 billion. However, even with this second set of data, the BAYC collection would still represent nearly 14% of the total NFT market.
This means that when the price of BAYC NFTs crashed in mid-2022, it likely had a strong ripple effect on the market as a whole. And, looking toward the future, if anything bad happens to the BAYC or one of the other top 10-15 NFT collections, it could potentially tank the NFT market again. One could compare this lack of asset diversity to the cryptocurrency market, which is dominated by BTC and ETH. However, this lack of diversity is still something we simply don’t see with traditional assets like stocks and bonds (at least not to the same extent).
Unfortunately, just like the crypto market, the NFT market is rife with scams, which has significantly impacted the industry’s reputation. This has also contributed to overall NFT price volatility, reduced trading volume, and, in turn, the 2022 NFT market crash. In fact, in December 2022, a class action lawsuit was filed, alleging that a variety of major including Madonna, Paris Hilton, Jimmy Fallon, Justin Bieber, Snoop Dog, and Steph Curry were paid to promote Bored Ape Yacht Club (BAYC) NFTs without disclosing they were paid by Yuga Labs, the parent company behind BAYC. Though it’s unclear what the current status of the lawsuit is, it is a strong example of how many famous names are paid to “shill” NFT projects. However, at least BAYC is considered a legitimate NFT project.
In contrast, the vast majority of NFT scams are considered “rug pulls,” in which an individual or group creates and starts promoting an NFT project, only to sell the NFTs as quickly as possible and disappear, leaving the early investors “holding the bag.” Since the long-term value of an NFT project often depends just as much on the initial team continuing to provide value (i.e., moderating social media communities, conducting AMAs, creating merchandise and games, giveaways, and partnerships), an NFT collection with an absent team quickly becomes valueless. For example, Bored Bunny, which was endorsed by Jake Paul, Floyd Mayweather, and French Montanna, was, at one point, one of the most hyped projects of 2022. The initial sale generated $21 million, however, right after the sale, the founding team “went missing,” rendering the NFTs suddenly worthless.
In addition to wash trading, money laundering is a persistent issue in the NFT space, and it too can cause a certain degree of market instability– mainly by reducing public trust in the NFT industry, which may have helped facilitate the speed of the NFT crash. While NFT money laundering volume is quite small compared to the overall estimated value of all cryptocurrency-related money laundering, it still has a net negative impact on NFT values and price stability.
Despite the 2022 NFT crash and the overall price instability of NFTs, the future of non-fungible assets appears incredibly bright. In fact, data from Grandview Research suggests that the global NFT market may reach as high as $211 billion by 2030, which would exceed the size of the current video gaming market as well as the market caps of many Fortune 500 companies.
Plus, NFTs in GameFi are also here to stay, with more developers creating blockchain technology-based NFT-focused games and major gaming studios exploring the possibility of incorporating NFTs into their existing products. While these NFTs may be more numerous and less expensive than some current gaming NFTs, they could still rapidly increase the overall market cap and sales volume of NFTs in the coming years. This will only be facilitated by the rapid growth of the ERC-1155 dynamic NFT standard, which allows NFTs to change their characteristics over time and also allows for large-scale batch minting and transfers, providing game developers and players significant gas savings. New tech also permits in-built NFT royalties for both art and GameFi NFTs, which provide the original creator or owner with a percentage of royalties each time the NFT is sold or traded.
In addition to uses in gaming, entertainment, and digital art, NFTs may become a pervasive part of daily life in the coming years. While not as sexy as digital art, we may see a future where ordinary documents and assets become NFTs– from driver’s licenses to event tickets, to deeds to homes– and even homes themselves. Some enterprising crypto-focused real estate startups have already tokenized regular homes and commercial real estate. Though some of these tokenizations utilize fungible tokens, many are fractionalized NFTs, NFTs that have been split into many pieces and distributed to different owners.
While the Ethereum blockchain currently dominates the NFT market and will likely continue to do so for some time, the growth of Layer-2s like Polygon, Arbitrum, and Optimism, as well as the rapid growth of Layer-1s like Solana, Sui, and Aptos could see the development of NFTs with added utility and features. The growth of NFTs on these platforms could introduce more asset diversity into the NFT market, which could potentially stabilize prices.
Despite this bright outlook, investing in individual NFTs like BAYCs or CryptoPunks is still a high-risk endeavor; and, in general, individuals and groups should only purchase NFTs with money they can afford to lose. For better or worse, due to the factors we’ve discussed, the market is likely to experience further booms and crashes throughout the next several years until the market fully matures, prices stabilize, and NFTs and other digital assets reach a broader audience. In essence, the NFT market collapse is only part of a broader cycle, and we can expect to see similar patterns in the future.
Finally, let’s pose a final question: when will NFT prices go up? The answer is impossible to predict accurately, but if historical trends tell us anything, the next NFT boom will closely follow the next crypto bull market, which is traditionally led at first by rising Bitcoin prices, followed by a boost in prices for other digital assets. However, timing the next bubble is a fool’s errand, so we’ll just have to wait and see what the NFT market has in store.
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