- An NFT bubble forms when the prices of the asset are inflated to a point where they are no longer justified, or valued beyond its utility.
- This happens in markets where investor behavior is mostly driven by hype.
- Since its peak in May, OpenSea has seen a drop in transaction volumes by 99%, sending a strong signal that the NFT bubble that formed over the past two years have indeed burst.
What is an NFT Bubble?
An NFT bubble is a situation where the price of a digital asset is driven up by speculation, only to crash back down again when the hype disappears. This often happens when new investors enter the market, driving up prices without really understanding what they’re investing in.
In January 2022, a 22-year-old computer science student sold 1,000 deadpan selfies of himself as NFTs on OpenSea, earning a cool million dollars seemingly overnight. He had listed them for sale for just US$3, but they went on to fetch upwards of approximately US$1,200 (approx. 0.4 ETH) at its peak. When we see stories like this, the answer seems to be a resounding “yes.” After all, what utility do you get out of it?
Sultan Gustaf Al Ghozali, a 22-year-old computer science student from Indonesia, converted and sold 1,000 selfie images taken over the last five years as NFTs, and pockets $1 million (Source: OpenSea)
Are NFTs a bubble?
The less straightforward answer is that it’s hard to say for sure. The NFT market is still relatively new, and it’s hard to predict how it will develop in the future. What truly matters is how the technology beneath these overpriced JPEGs promise.
In an interview with CoinDesk, former director of the Metropolitan Museum in New York Thomas Hoving estimated that about 40% of the objects to have passed through his hands were fakes or forgeries. This problem of provenance i.e. the history of production and ownership of a piece of art, has been a long-standing issue in the art world. NFT technology can provide an immutable record of who the real creator–and the previous owners–of a piece of art, were.
Tell-tale Signs of NFT Bubble Burst
It is important to be aware of the risks involved in buying NFTs. As with any digital asset or cryptocurrency, here are some things to look out for that could signal the end of the NFT bubble:
- NFT prices start to fall drastically: This is usually the first sign that the NFT bubble is about to burst. If you see the prices of NFTs start to fall dramatically, it’s a good idea to keep a close eye on your NFT investments.
- Reduced media NFT coverage: As mentioned, the media can play a big role in driving up the price of an NFT. If you see that the media coverage around NFTs starts to die down, this is a red flag that the NFT bubble may be about to burst.
- People start to sell their NFTs: Finally, if you see that people are starting to sell their NFTs, This is often a sign that the NFT bubble is about to burst.
Are NFTs Losing Value – Has The Bubble Burst?
The best place to look to in answering this question would be where all the action happens. In May 2022, the leading NFT marketplace was doing brisk business, processing $2.7 billion in transactions. Fast forward four months later, and trading volume has dropped 99% to $9.34 million, according to statistics from DappRadar.
“The bubble has burst, or still has to burst,” says Pedro Herrera, DappRadar head of research said in an article with The Globe and Mail in August. “Ninety to 95 per cent of the projects that we currently see in the market, in two years, will be worth close to zero.”
Many people believe that this NFT value drop is related to the recent crypto market crash. When the prices of Bitcoin and other cryptocurrencies fell, the prices of NFTs also dropped.
Should You Sell Or Hold?
The market has a way of sifting out true performers from hyped-up projects, especially when the going gets rough. If you are holding an NFT, should you sell or hold?
Try asking yourself this question from another angle: if the value of your NFT never goes higher than what it currently fetches, or even if it goes entirely to zero, will you still hold it because of its community, the value it offers and for the sake of owning it itself? If you can say “yes,” that may be all the answer you need.