Are NFTs still as valuable as they used to be? | Explained

NFTs shot to dazzling highs in 2021 as individual pieces sold for millions of dollars and traders proclaimed a new mode of digital ownership and investment. But two years later, are most NFTs close to worthless?

September 27, 2023 11:44 am | Updated 07:08 pm IST

A group of people attend a metaverse event [File]

A group of people attend a metaverse event [File] | Photo Credit: REUTERS

The story so far: A crypto gambling platform, dappGambl, which looked at tens of thousands of NFT collections concluded that most of them were worth close to nothing. This is a far cry from two years ago when NFTs were believed to be a revolutionary new investment vehicle and enjoyed the support of celebrities worldwide.

NFTs, short for non-fungible tokens, are blockchain-based tokens where each one is unique and can be distinguished from all others in existence. NFT trades are recorded on the blockchain, so the current ownership can be proved at any time. However, dappGambl estimates that most NFT owners’ investments are “worthless”.

Who makes NFTs and why do people buy them?

Almost anyone can make, or “mint”, an NFT on blockchains like Ethereum or Solana, with some money and technical knowledge. NFTs can be photographs, art, pixelated avatars, music, and digital icons. A popular NFT collection called the Bored Ape Yacht Club (BAYC), for example, consists of 10,000 NFTs of cartoon-style monkeys with laser eyes, military uniforms, zombie features, or other accessories. These ape NFTs were also bought by pop stars like Justin Bieber and Madonna, as per media reports. Of course, anyone can simply download or screenshot the Apes for free, but the buyers get to be identified as the owner of the digital property - as long as it is not stolen from them by hackers.

A screenshot of the Bored Ape #3001 reported to have been bought by Justin Bieber

A screenshot of the Bored Ape #3001 reported to have been bought by Justin Bieber | Photo Credit: OpenSea NFT Marketplace

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People buy NFTs and wait for their value to grow before selling it to other interested buyers. Alternatively, they keep NFTs for personal enjoyment and to access the NFT community. Musicians, actors, and global organisations quickly saw the potential of a technology that would let them market one-of-a-kind merchandise to fans. In India, actor Amitabh Bachchan’s NFT collection, which included his voice recordings and vintage posters, was auctioned off for more than ₹7 crore in late 2021.

NFT-based online games such as Axie Infinity are also extremely popular, especially in countries like the Philippines. These are classified as play-to-earn games where users can collect digital assets and trade them to make real life gains. The game consists of digital pets called “Axies” that players can breed and sell. Axie Infinity’s traction was also boosted by the COVID-19 pandemic as many Asian players relied on the game to earn money during lockdowns. However, the game’s skewed economics was the subject of much criticism.

2021 was also a historic year for the crypto sector as the top two coins by market capitalisation - Bitcoin and Ether, respectively - both hit their all-time highs in price. For Bitcoin, this was more than $65,000 while Ether crossed $4,600. Amidst this euphoria, many popular NFTs based on the Ethereum blockchain were quickly bought up in the hopes their prices would also balloon in the future.

What are the criticisms against NFTs?

NFTs have been criticised by financial regulators, artists, and environmentalists.

Financial regulators have warned NFTs are unregulated assets that are part of a highly volatile market, so investors are not protected in case of a loss or legal action against the founders.

Artists have complained that many of the NFTs being sold on centralised marketplaces like OpenSea are actually pirated versions of their own paintings, which were minted as NFTs without their permission and resold to multiple buyers without a single cent reaching the original artist. Some artists had to plead with NFT marketplaces or Google to take down stolen works, while others decided to stop posting their art online for safety reasons.

NFT critics have also pointed to the environmental cost of minting NFTs or making transactions involving them. Many NFTs which are in high demand are based on the Ethereum blockchain, whose annual power consumption and carbon footprint matched that of small countries before the Merge upgrade. When the World Wildlife Fund tried to mint NFTs to raise funds, it claimed it was using the more eco-friendly blockchain Polygon, which was made in India. However, Polygon is still linked to Ethereum and the two function together, so WWF was lambasted for its NFT debut. WWF UK said it was ending the trial and noted NFTs were a “much debated issue.”

dappGambl looked at 195,699 NFT collections which did not seem to have any owners or market share.

“The energy required to mint these NFTs is comparable to 27,789,258 kWh, resulting in an emission of approximately 16,243 metric tons of CO2,” said the gambling site in its report, comparing this to the yearly emissions of 3,531 cars.

Have NFTs crashed?

According to dappGambl’s report, most NFTs are now worthless. Out of the 73,257 NFT collections it identified, 69,795 collections had a market cap close to zero, as per the platform. When dappGambl looked at the top 8,850 NFT collections as per the blockchain analytics site CoinMarketCap, it found that more than 1,600 of these top NFTs were dead.

Even when studying the ultra popular NFT collections that went mainstream, there was a definite drop. Bored Ape #3001 - for which Justin Bieber reportedly spent more than $1 million - plunged to around $60,000 this year, reported CNBC.

The prices of crypto assets change wildly based on real world occurrences and technical factors across borders, so it is almost impossible to pinpoint a single reason for the NFT crash.

Looking at real world events, Russia’s invasion of Ukraine in February 2022 shocked both traditional finance and crypto markets, causing investors to become more fearful and risk-averse.

Coming to the crypto economy, the Terra (LUNA) cryptocurrency collapsed in May 2022 in spite of its top ten market cap. This destroyed billions of dollars in value and triggered a liquidity crunch across crypto exchanges and lenders. Later in the year, the FTX exchange collapsed and its CEO, billionaire Sam Bankman-Fried, was arrested. As Bitcoin touched multi-year lows in 2023, many investors sold their assets due to panic.

Inflation and mass layoffs in the tech sector were other factors that may have reduced the appetite for an experimental investment product.

Has the NFT crash affected the Metaverse as well?

It is important to make a distinction between the blockchain-based metaverse, which refers to the virtual ecosystems where activities and payments rely on cryptocurrencies, and Meta’s metaverse, which describes a virtual reality accessed through VR/AR hardware tools in order to work and play.

Due to the NFT crash, there is not much incentive to play in crypto metaverses which depend on NFTs, and their accompanying crypto tokens also fell. For example, ‘The Sandbox’ metaverse’s SAND token has lost 64.78% of its value in the past year.

However, Meta was also affected by the NFT crash. The social media platform had introduced options for crypto traders to display their NFTs on Facebook and Instagram in 2022, but said this March it was “winding down” the NFTs it called “digital collectibles,” Reuters reported.

Will the NFT market recover in the future?

The crypto economy is extremely volatile so it is difficult to predict whether the NFT sector will recover, leave alone return to its bull run highs. While rising Bitcoin and Ether prices could give NFTs a leg-up, the two cryptocurrencies are also maintaining price ranges far below their 2021 record highs.

Now, in the aftermath of the FTX exchange collapse, more regulators are looking closely at the sale of digital assets. Most recently, the U.S. Securities and Exchange Commission charged an NFT-based web series called ‘Stoner Cats’ with “conducting an unregistered offering of crypto asset securities” in the form of NFTs. The SEC said that the project raised around $8 million to fund the ‘Stoner Cats’ series which includes actors such as Mila Kunis. ‘Stoner Cats’ chose to settle with the SEC and pay a fine.

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