With the crypto market down by more than $500 billion in recent weeks, it’s no surprise that NFTs prices are in free fall as well. Despite their initial hype, the digital asset has lost some of its appeal. High-profile hacks and thefts have contributed to their deflationary price action. Dropping investor interest has also weighed on their price. But what exactly are some of the causes of the decline?
Investors are feeling jittery about the future of the non fungible token (NFT) market after a few high-profile hiccups have hit the market. Axie Infinity’s temporary shut down in March was blamed on hackers stealing more than $600 million in tokens.
Also, Bored Ape Yacht Club reported being infiltrated by North Korean hackers, which resulted in the theft of $2.8 million worth of NFTs. A recent news report indicates that the fees for transactions are actually higher than the actual value of the NFT. In addition, the market for NFTs has been hit hard by the Bitcoin-led market correction, which has deflated investors’ enthusiasm for the tokens.
The recent market correction is yet another indication that a high-profile NFT bubble may be taking hold. One such example is the Azuki collection, which saw its floor price tumble from 19 ETH to 10.9 ETH, or from 41,800 to $24,000. This may be a result of the crash in the crypto markets and a hiccup in the project’s financial backing.
Ethereum’s deflationary protocol
It is difficult to say whether Ethereum is deflationary, but many believe that it will be once it switches to the Proof-of-Stake (PoS) protocol. PoS is an upgrade to Ethereum’s current mining protocol that cuts the issuance rate in half and instead rewards staking. Since Ethereum 2.0 will transition from a proof-of-work network to one based on stake, the issuance rate will drop by 90 percent and be deflationary.
While most blocks have burned under 1.5 ETH since EIP-1559 went live, the burn mechanism will occasionally make a block deflationary. During the last week, over five thousand ETH were burned for every new one, bringing the rate of deflation below Bitcoin’s. It will be interesting to see how much the new deflationary protocol will lead to in the next few months. Until now, no blockchain has experienced negative supply issuance.
EIP-1559 has addressed Ethereum’s inflation problem by burning ETH tokens that were paid in gas fees. The new version of the protocol is estimated to burn $67 million worth of ETH in a day. Although this is a significant amount, it is not clear if the deflationary issuance will be beneficial for everyone on the Ethereum network. It will result in a simpler fee structure and faster transactions. The burn rate alone could boost the price of ETH significantly.
Dropping investor interest
While NFTs are still considered (in some circles) to be the next big thing in the finance ecosystem, they have suffered from a drop in investor interest over the past several months. The initial craze for these collectibles was short-lived, with sales plummeting by early May.
And with the rise of fakes and oversaturation, the industry has experienced growing pains. Despite these challenges the global NFT market size is expected to grow from USD 3.0 billion in 2022 to USD 13.6 billion by 2027, at a Compound Annual Growth Rate (CAGR) of 35.0% from 2022 to 2027
Yet, the decline in cryptocurrency prices has put a damper on the market for non-fungible tokens. According to CoinMarketCap, the average sale price of an NFT has fallen to around $2,000 compared to $6,800 in January 2022. Cumulative daily sales have also dropped significantly on average. Although the primary market has maintained a relatively steady level of activity, secondary market sales have fallen almost 92%.
While the market for NFTs is still growing, it has slowed considerably in 2022. Google Trends search interest for ‘NFT’ has decreased substantially since mid-January. In the same period, the most popular countries for searches on ‘NFT’ are Singapore, Hong Kong, and China. Which leads many to believe that emerging markets are ripe for NFT investment and speculation. The NFT space is still nascent with new use cases as well as associated price volatility.
I write about blockchain, crypto, NFTs and other disruptive technologies and innovations.