2021 was the peak of NFT hype, and trading volumes and prices of the most famous NFT collections reached astounded levels, with jpeg images selling for millions of dollars. Many investors and crypto enthusiasts invested in NFTs and generated incredible returns, considering, for example, that Crypto Punk NFTs, one of the first and most famous collections, were minted for free and reached an all-time high average price of more than 100 ETH during the boom. However, hype and FOMO (fear of missing out) can’t last forever, and during 2022, the prices of most of the NFT collection started dropping, and trading volumes and values never returned to 2021 levels. So, are NFTs dead? Will they reach the prices and adoption of 2021 again? Or was I just a temporary speculative bubble that burst and deflated?
According to various sources, more than 95% of NFT collections can be considered dead because there is no trading volume, interest, nor any underlying value or utility. However, some of the most iconic collections achieved cult status and have retained significant value, such as in the case of Crypto Punks, Bored Ape Yacht Club, Azuki, and a few others. In this analysis, we’ll research the reasons behind the failure of most of the NFT projects, understanding the challenges and the rise and fall of them.
Non-Fungible Tokens (NFTs): How do they work?
Non-fungible tokens are unique digital assets registered in an immutable way on a blockchain, such as Ethereum, Solana, Cardano, or others, and they are useful for verifying ownership of an asset through smart contracts. They usually are images, gifs, videos, tweets, documents, and more: any digital content can be registered on a blockchain as an NFT. The NFT hype started and was fueled by the increasing adoption of blockchain technology, cryptocurrencies, and metaverse, also due to the fact that people spent more time at home online due to restrictions and lockdowns during the Covid-19 pandemic. It resulted in a cultural shift and enthusiasm toward digital assets and ownership, and the idea of owning and trading NFTs and cryptocurrencies from home became increasingly appealing. The NFT market quickly expanded, and platforms like OpenSea, Rarible, and Foundation enabled creators to reach a global audience of collectors and traders. For a time, it seemed as though NFTs were an unstoppable force, reshaping industries and redefining what it meant to own something in the digital age.
What are the main use cases of NFTs?
Even if most NFT projects were focused on hype and speculation, there are various fields in which they can be useful and innovative.
Digital art collectibles
NFTs allow artists to tokenize their work, providing proof of authenticity and ownership. It is very valuable and useful since digital assets can easily be duplicated online, and NFTs solve this problem by creating a unique, immutable, tradable asset stored on the blockchain. This uniqueness means that unlike other tokens stored on blockchains, such as cryptocurrencies like Bitcoin or Ethereum, they are unique or non-fungible (i.e. not perfectly substitutes) hence the name.
Gaming and Metaverse
In games, players usually purchase skins, weapons, and more inside the games. With NFTs, the assets purchased are registered on the blockchain as yours, and you can be able to resell them on various marketplaces, even outside the game itself.
Identity and certification
NFTs can be used to represent certifications, licenses, and digital identities, providing proof of ownership for them. For example, you can follow a course online and get a certification through an NFT immutably stored on the blockchain, proving your participation forever.
Music and entertainment
Musicians and creators can use NFTs to sell their work directly to fans, offering exclusive content or experiences. This can include albums, concert tickets, or backstage passes. It streamlines the process by removing intermediaries and creating a closer relationship between the artist and fans.
Real estate
Through tokenization, NFTs can represent ownership of physical properties, facilitating easier and more transparent real estate transactions. They can also be used for fractional ownership, allowing multiple people to invest in a property.
Supply chain
NFTs can be used to track the provenance of goods in a supply chain. Through a QR code, for example, you can easily track the source of the good, ensuring transparency and authenticity, especially for luxury assets, pharmaceuticals, or food products.
What are the most expensive NFTs sold?
The hype and the ability to register ownership of assets on a blockchain generated incredibly expensive sales, and various artists and collections became incredibly valuable. Here are some of the most expensive NFTs sold:
1. The Merge by Pak – $91.8 million
Pak is an anonymous person (or team) that created the most expensive NFT in history, sold at $91.8 million in December 2021. Unlike most of the NFTs, The Merge is a collection of “masses” that multiple buyers purchased. Specifically, 28,983 collectors purchased 312,686 units of mass.
2. Everyday by Beeple – $69.3 million
Beeple is probably the most famous NFT artist in the world, and he is currently creating amazing artistic pieces using a well-ponderated satire and incredible 2D and 3D modeling skills. Everyday is a collage of 5.000 individual pieces of art and was sold for $69.3 million in March 2021.
3. Clock by Pak – $52.7 million
Clock is another NFT created by Pak in collaboration with Julian Assange, founder of WikiLeaks. It is basically a timer that counts the number of days Assange has been imprisoned. It was purchased by around 10.000 supporters in February 2022 to help Assange’s legal defense.
4. Human One by Beeple – $29 million
Another digital art of Beeple is featured in the fourth position, and it represents a kinetic video sculpture combining physical and digital technology, representing “the first portrait of a human born in the metaverse”. This art piece was sold in November 2021 for $29 million.
5. Crypto Punk #5822 – $23 million
Crypto Punks is the most famous collection of NFTs, created in 2017 by Matt Hall and John Watkinson, and representing 10.000 unique 24×24 pixel art characters generated algorithmically. The Crypto Punk #5822 is particularly rare because it is one of the only nine alien punks and was purchased in February 2024 for $23 million by Deepak Thapliyal.
Why have NFTs become untrendy since 2022?
Even if there is still great potential in practical use cases of NFTs, since the middle of 2022, most people have lost interest in non-fungible tokens, and trading volumes and prices across marketplaces have drastically dropped. According to a recent analysis, more than 95% of the collections created are now worthless, and even the most famous NFT collections saw significant reductions in prices, trading volume, and, in general, interest. Should we define 2021 as a speculative bubble for NFTs? Probably yes, but there are various significant reasons that caused the loss of interest from people and communities:
Speculation
The quick drive of interest in NFTs and rapid adoption contributed to instilling in people the belief that NFTs would rapidly revolutionize a lot of sectors in the world, including art collections, brands, games, and more. However, when the initial hype drops, the prices reflect the expectations of people and drop too consequently. We can say that the 2021 NFT hype was a speculative bubble in which most of the investors wanted to make money quickly without considering the risks and the real underlying value of the NFTs. Collections that made no sense and had no utility yet sold for thousands of dollars during the bubble quickly became worthless.
Market Saturation
The first NFT collections represent a new paradigm shift and can be considered “cults”. Collections such as the Crypto Punks or the Bored Ape Yacht Club actually innovated the digital art sector and created a sense of community and innovation among members. However, the market quickly became saturated, with thousands of collections offering no new utility or competitive advantage.
Lack of utility
Most NFT projects created beautiful and complicated whitepapers describing how their projects could innovate the sector by providing exciting utilities such as governance, discounts, digital games, and more. However, a project cannot retain hype and interest by providing “basic” utilities that cannot last longer. If the only “main” utility of an NFT collection is the digital art stored on the blockchain, it can be cool, but it’s not a utility. Holders didn’t know what to do with their NFTs, and we must consider that collectors’ main interest was profit, consequently aiming to sell the NFT at the market’s price peak.
Regulatory concerns
Even if the NFT project was able to provide useful utility and create a rewarding system for holders, if it means giving back to holders a revenue share of the company, it means that NFTs were security tokens, and it raises concerns about the regulatory implications and compliance. If a project sells an NFT by promising returns on the investment, it must strictly comply with regulatory entities because such assets are considered securities and are regulated by the SEC. Also, the difficulty in declaring NFT trading profits without a clear legal framework to pay taxes made it complex for investors to have peace of mind when cashing out.
High gas fees and complex accessibility
The most popular and famous NFT collections are stored on the Ethereum blockchain, and every transaction done on it brings a high gas fee (payment to miners/validators to complete the transactions and write it on the blockchain). Consequently, the NFT market is not so accessible to all kinds of users, and trading was reserved for users who could afford expensive gas fees, often more than $100 for a single transaction, depending on the volume at that moment. Consequently, it’s worth spending that amount of money only if you’re trading an asset that is worth more than $1.000, for example, limiting the potential audience for this market’ segment.
Post Covid-19 recover
Pandemic restrictions and lockdowns forced people to stay at home, and many of them explored new emerging technology and ways to make money online. When normal life resumed, many people spent less time online trading digital assets like NFTs, and their interests shifted back to real-life experiences and real connections with friends. It reduced the engagement in the virtual world and decreased the interest in Metaverse and NFTs.
Scam and frauds
As in the crypto world more generally, the NFT market is also full of risks and scam attempts. Many NFT projects were basically rug pulls, in which the team offered investors NFTs by promising exciting future developments and utilities, such as play-to-earn games, innovative brands, and more. However, in some cases, after selling the NFTs, the team disappeared with the loot, leaving the project without realizing the promises made. It discouraged existing and new buyers, creating a sense of fear in the market: Nobody wants to lose money in a scam project: Watch out for the red flags.
Lack of long-term project profitability
The most important factor, probably, is that most NFT projects couldn’t create a continuous cash flow and income over time because they basically profited only through the NFT sales without offering valuable services and products. If a project cannot build a sustainable way to increase utilities and value, it is likely destined to fail in the long term, as happened with the majority of crypto projects. Without a source of income, the project cannot pay the team, cannot provide utilities to holders, and cannot be sustainable.
Are NFTs dead? A final overview
Even if most NFT projects were unsuccessful, it doesn’t mean that they are not a good tool. NFTs can be useful for various activities and in various fields, as explained previously. So, are NFTs dead? While the market may have cooled, NFTs are not dead. Instead, they are transitioning from a speculative bubble to a more stable and functional technology with diverse applications (for more in depth analysis of NFTs and their potential use-cases click here: https://trakx.io/resources/research/nft-wtf/). The future of NFTs will likely be shaped by projects that can demonstrate real-world utility, transparency, and value beyond mere speculation. If you’re interested in investing in reliable and promising projects related to Metaverse and NFTs, consider exploring the NFT Metaverse Crypto Index provided by Trakx.
