NFT Market Takes a Step Back… to Gain Momentum?

The cryptocurrency market has been suffering significant declines for months. Just a few days ago, we recounted a ‘Black Thursday’ in which different cryptocurrencies accumulated a combined value loss in exceeding $200 billion.

This situation also threatens the so-called non fungible token (NFT) market. “We have experienced a week of panic in speculative investments in cryptocurrencies, following the collapse of Terra/Luna and Blockchain, so it is feasible to think that something equivalent could happen in the NFT arena,” says Carlos Guardiola, director of New Business at Ironhack,

In fact, there are some data that seem to confirm the cooling of this market. According to the latest ‘NFT Market Quarterly Report‘, prepared by NonFungible, the NFT market has experienced a significant readjustment in the first quarter of 2022, with the number of sales almost halving compared to the previous quarter. At the same time, losses on the resale of these assets have increased by nearly 50%.

Similarly, Guardiola cites a recent article published by The Wall Street Journal, which reported on the plunge in NFT sales and purchases, from 225,000 transactions in September 2021 to less than 20,000 in May of this year.

Is there a ‘bubble’?

Given these data, it is worth asking whether there is a ‘bubble’ in the NFT market and, above all, whether it is bursting. The experts consulted offer different points of view in this regard.

“That there are fewer transactions does not determine that there is a bubble. The concept ‘bubble’, in financial terms, refers to a market in which the price of assets rises rapidly and uncontrollably for purely speculative reasons, which do not correspond to their real value. What we would have to ask ourselves to know if there is a bubble in the NFT market is whether the people who are buying them are doing so because they want the digital asset they have bought or because they consider it a speculative investment and what they expect is to sell it at a great revaluation in the short term”, comments the Ironhack expert.

Given this reflection, Guardiola considers that there is indeed a bubble in the NFT market. “I’m not saying that an NFT doesn’t have a value and utility. My view is that its most accepted use case right now is to understand an NFT as a speculative investment asset, subject to high volatility. Surely, single NFTs are bought because they are expected to appreciate in value.”

As to whether there is a pricking of this bubble, he believes it is a market contraction cycle. “The volatility of these types of markets means that growth and contraction cycles go back and forth. My view is that it is possible that we are now in a contractionary cycle, and that precisely this will be an opportunity for new investors to enter at minimums, which will relaunch the expansionary cycle once again,” he says.

In a similar vein, Alberto Grande, head of Innovation at Paradigma Digital, explains that “the expectation around the possibilities of the sale and purchase of NFTs has produced an excess of information that has resulted in a huge growth of this market, mostly due to the possibilities of speculation of the same”.

“This situation has led to content creators taking advantage of this wave to try to sell their assets, filling the market with assets that buyers were eager to acquire, hoping for a revaluation in the future and without paying attention to the main purpose of the NFTs they were buying: the art they represent. It seems clear that the situation caused prices to inflate disproportionately and that the current situation of market regularization or correction is happening as abruptly as the growth was.”

On the other hand, Alan Verbner, co-founder of Atix Labs, a Globant division specialising in blockchain and cryptoassets, recognizes that “there has been a significant correction within the market,” but considers that “this is not necessarily a negative thing.” While NFTs are not new, during this last time there has been a great expansion in terms of experimentation and generation of new use cases. In this type of process, there are numerous trials and failed attempts. As a result, some very interesting projects have emerged that have opened the door to new opportunities in a number of completely new applications,” he says.

What about this year?

With these elements on the table, the question is how the NFT market will evolve this year. If we focus on price evolution, Grande thinks that “regularization is going to continue and that it is going to be a process that will take quite some time.” “Many of the collections that exist right now, in many cases computer-generated in an automated way based on templates, will lose a lot of the value that was once assigned to them. On the other hand, I would say that this situation will strengthen other types of NFTs, not so focused on the possibilities of speculation, but purely on artistic expression,” he adds.

Guardiola warns that it is difficult to make predictions, but shares some reflections that can serve to guide us. For example, he emphasizes that the utility of NFTs could affect their valuation. “There is one use case, which is not yet massified, which is to use or put to interact your NFT in games or metaverses. As these platforms gain maturity and grow in volume of users, the digital asset held ceases to be merely something speculative, as it can have a practical use. This maturity of the platforms where NFTs are used will lead to the incorporation of ‘players’ into the market, as opposed to speculators; to the normalization of the price of assets; and to their circulation slowing down. If something is in use, it will not be sold until it is no longer in use,” he says. However, the use and acceptance of these metaverses by users does not seem to be immediate.

Verbner adds that “it is more than likely that, over the next few months, we will continue to see more failed experiments”. However, he believes that “many others will definitely establish themselves, expanding into more established companies or brands, which will be used as vehicles to take their intellectual property to new spaces, such as the metaverse, allowing them to generate business in environments that until today they were not even considering”.

In addition, the head of Ironhack warns about a possible increase in scams and attacks in 2022. “Bored Ape’s notorious NFTs were the subject of an attack in April 2022, which resulted in the theft of parts worth more than $3 million. Through phishing techniques via Instagram, the attacker managed to trick people, get their hands on their NFTs and transfer them to their ownership. That means that their rightful owners lost their property, without receiving money in return, leaving a certified property transaction on the blockchain. As a counterpart, we will also see new and increased investments in security,” he notes.

Different perspectives depending on the type of NFTs

We should keep in mind that not all NFTs are the same, so the perspectives are very different depending on the type we are referring to. In the case of artistic NFTs, the co-founder of Atix Labs considers that “the ones that are going to have the longest run are those that can give an extra value to the piece of art, whether physical or digital”. He stresses that “the right of ownership and originality that possession represents today is also a very important element for the future of NFT”.

Also, Guardiola believes that “the community of digital artists will continue to explore the model, because it is a very interesting way to scale and connect with new audiences”. “More and more artists and creators are going to try listing their work on NFT platforms. And, as usual, when a market becomes saturated with supply, premium environments will emerge. Also, the fact that a smart contract allows the artist to earn an income on each transfer of their work opens up a hitherto non-existent revenue stream. It’s something I would pay attention to,” he says.

Another market with high expectations is that of sports NFT collectibles. According to Deloitte’s ‘TMT Predictions 2022’ report, this type of NFT will generate more than $2 billion in transactions in 2022, twice as much as in 2021. And between 4 and 5 million sports fans worldwide are expected to have purchased or been gifted an NFT collectible sports item before the end of the year.

Verbner believes the collectibles industry is the most exciting. “To date, collecting has been about owning physical, material items, such as artwork, cars, jewelry, etc. In many cases, from a nostalgic perspective. However, we are starting to see a digital mode of collecting, which is going to increase with the definitive implementation of virtual spaces, such as the metaverse, and in which different types of NFT are going to become very relevant,” he says.

Then we have digital property assets with utility in the digital world, such as in video games or metaverses. “For me, gaming is the most important breeding ground for all these types of digital businesses. We have seen it recently with the issue of loot boxes and their ability to generate impulsive revenue, to the point of attracting the attention of governments and the regulator,” says Guardiola.

In addition, the Atix Labs expert comments that in video games and metaverses “is where we find the biggest challenge: how to make these NTFs – items, features, perks, avatars… – interchangeable between different video games, metaverses and blockchain”.

This is a contentious issue. “Why would a video game like Fornite, to give an example, want to allow the free sale and purchase of NFT when it already has its own internal market that it fully controls?”, asks the head of Innovation at Paradigma Digital.

However, he considers that “the situation is different from the point of view of virtual worlds or metaverses, since many of them are born directly with that vocation”. “When these worlds become popular, I think that the market will have a very wide range, probably with a similar lack of control as we have experienced this last year with art, to later consolidate and develop in a more controlled way,” he says.

In any case, the head of Ironhack is convinced that the market for this type of NFT will continue to grow. “One thing that is not necessary to validate is that people spend real money to buy virtual goods and use them in games. Ten years ago, in 2012, a Diablo 3 legendary Echoing Fury mace was already sold for $9,700. Recent alliances and acquisitions of sportswear companies, such as Nike or Adidas, invite us to think that there is a whole market in the making for branded sports products for our avatars. The fact that it is no longer the video game developer who gets the revenue, or that this does not respond to a one-off collaboration such as those enabled by Epic in Fornite, but responds to a long-term strategy of the manufacturers. is also something to follow very closely,” he specifies.

On the other hand, Grande talks about digital assets that represent physical assets or provide identity or exclusivity in the physical world. “So far there are few such cases. Firstly, because it would depend on a regulation that so stipulates. Let’s think that we are in a world where our identity document is still physical and where means of payment such as credit or debit cards have only recently become available in digital format. And secondly, because, for the time being, there is still a significant barrier to entry to the web3 world and, therefore, to NFT. In my opinion, this is the field that is going to have the greatest potential and that is going to evolve the most. In a few years, the barrier between the physical and the digital will not be the gigantic wall we have today,” he predicts.