2022, the year NFTs fell to earth
Has the NFT bubble burst? As we approach the end of the year, data shows that the marketplace for these unique digital assets is shrinking by almost every metric.
Yahoo Finance UK looks back at 2022— a year when digital collectibles returned to Earth.
There has been a hemorrhaging of value in the NFT market through 2022, a loss that could not be reversed despite tech companies like Meta ( META ) developing a digital collectibles feature for Instagram, and Reddit introducing its Collectible Avatar NFT series.
The number of active NFT wallet addresses declined throughout the year, leading to a drop in trading volume on the OpenSea NFT marketplace, which is seen as the Amazon ( AMZN ) of NFTs, according to data from blockchain tracking software DappRadar.
OpenSea’s best trading day this year, May 1, saw a record $2.7 billion (£2.2 billion) in NFT transactions, but its worst day a few months later, August 28, saw just $9.34 million in trade volume.
OpenSea said: “We play the long game because we see what is possible, so we are not too concerned about short-term volatility.
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“We’ve always expected hype, hype and deflation as the community and use cases evolve, the technology becomes more sophisticated, and creators figure out how to build more utility into their projects.”
As the year progressed, the entire cryptocurrency market began to buckle under the strain of a gloomy macroeconomic environment led by monetary tightening by the US Federal Reserve, and uncertainty among institutional and retail investors.
In October, blockchain incubator and consultancy Consensys released a report titled The State of NFT Markets 2022 which said: “The market for non-fungible tokens (NFTs) has had a tough few months alongside this year’s broader fall in asset prices.
“A distressed macro environment has significantly reduced on-chain activity across the crypto ecosystem, bringing prices down across the board from 2020-2021 highs as investors move down the risk curve and liquidate positions.”
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The biggest loser in the NFT sector this year has been Arts & Collectibles which the Consensys report cited as in continuous decline since August 21, 2022.
The FTX cryptocurrency exchange collapsed in early November, coinciding with a Google ( GOOGL ) report showing that searches for NFTs fell 88% in less than a year.
Between January and September 2022, NFT trading volume fell by 97%, from $17 billion in value to just $466 million, according to Bloomberg.
From March to June, the combined NFT market capitalization fell by 40%, while trading volume fell by 66%, suffering along with the general collapse of the cryptocurrency market following the fall of Terra’s UST algorithmic stablecoin.
Read more: 2022: The year in review
As the crypto market retreated, after a long “crypto winter”, NFT prices and transactions have fallen off a cliff, with holders of high-value NFTs, such as Bored Ape Yacht Club, preferring to keep their holdings for a possible future lift in the market and renewed bullish sentiment.
NFT Highlights 2022
But there were some positive highlights from 2022, which otherwise saw a roller coaster ride down the entire NFT market.
March: Instagram NFT announcement
At the 2022 SXSW festival in Austin Texas, Mark Zuckerberg, CEO of Facebook owner Meta, took to the stage to announce that his company is “working on bringing NFTs to Instagram in the near term”.
However, he added that he was “not ready to announce exactly what it’s going to be today”.
The announcement raised questions about which blockchain the NFTs will be distributed on, which payment channel will be used to purchase them, and whether Instagram will become a new marketplace for NFTs, in direct competition with Opensea, Rarity, and Nifty Gateway.
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Many artists, musicians and fashion designers use Instagram as a platform to showcase their creations.
If Meta allowed every photo on a user’s Instagram page to be monetized as an NFT, it would be a major disruption in a market currently controlled by OpenSea, which operates using the Ethereum (ETH-USD) blockchain.
The announcement was followed up with an Instagram statement in August about a partnership with Coinbase and Dapper labs to create wallets for users to store funds from sales and for purchases.
It said: “We now support wallet connections with Coinbase Wallet and Dapper, as well as the ability to post digital collectibles minted on the Flow blockchain.
July: Reddit collectible avatars
In July 2022, Reddit introduced Collectible Avatars as an extension of the platform’s revamped Avatar Builder system.
Collectible Avatars are limited edition digital collectibles created by independent artists that provide unique benefits to their holders. According to Reddit, Avatar holders can get “special treatment on their posts and can choose customizable wearables”.
The first 31 special editions of the Avatar series sold out. Reddit users bought them through the Reddit Collectible Avatars Shop with dollars. They are stored on polygon-based digital wallets.
December: Donald Trump NFTs sell off
A surprise year-end surge for the NFT market came in December with Donald Trump’s NFT trading card selling out and raising over $5 million.
In early December, the former president posted on the Truth Social platform: “My official Donald Trump Digital Trading Card collection is here!”
Trump’s collection consists of 45,000 NFTs on the Polygon blockchain, priced at $99 each.
Although the NFTs were widely mocked by Trump supporters and critics alike, all 45,000 sold out in about 12 hours, according to OpenSea data.
What are NFTs?
Non-Fungible Tokens (NFT) are a type of digital asset that are unique and non-fungible.
They are used in a variety of ways and can be used to represent anything from artwork, to digital collectibles, to digital tickets.
The first known NFT, Quantum, was created by Kevin McCoy and Anil Dash in May 2014. It consists of a video clip created by McCoy’s wife, Jennifer.
2021 saw a huge explosion and increase in NFT supply and demand, with a market cap rising to over $40 billion.
2021 was the year the NFT market swelled and developed into a number of zero-use digital assets. A year when digital images of cartoon monkeys sold for millions each, with Bored Ape Yacht Club and CryptoPunks sales collectively peaking at over $17 billion.
This was the year of NFT celebrity endorsements from the likes of Paris Hilton and Snoop Dog, with the high-water mark being Christie’s sale of Beeple’s Everydays: the First 5000 Days NFT for $69 million in March of that year.
In terms of market volatility, the prices of NFTs may fluctuate due to the volatility of the cryptocurrency markets.
This is because many NFTs are based on the Ethereum blockchain and are therefore subject to the same market forces as other cryptocurrencies.
In addition, the value of an NFT can be affected by changing sentiment in the market. If people feel bearish about the NFT market, it can cause prices to fall.
Another potential problem is a lack of liquidity. Since the NFT market is still relatively new, there is not yet a large enough market to provide liquidity to NFTs. This means that it can be difficult to find buyers for NFTs and a lack of liquidity can lead to a decline in value.
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The unique innovation provided by NFTs was to take work created by artists and turn them into a disposable digital resource, which could be exchanged and stored in digital wallets, online exchanges and distributed in the metaverse landscape.
One of the most profitable use cases for NFTs is in the digital collectibles space.
Digital collectibles, like CryptoKitties, are unique digital assets that can be bought, sold and traded.
By using NFTs, users can prove ownership and authenticity of their collectibles.
This has enabled a new form of digital asset trading, with users able to buy, sell and trade their collectibles without having to worry about counterfeiting.
NFTs can also be used in-game to represent in-game items, such as weapons, armor, and other digital assets.
What awaits in 2023?
Despite the potential for NFTs to lose value, they are still seen as a viable investment option. The potential applications of the underlying technology behind NFTs are almost limitless, with new applications being discovered every day.
The key to buying an NFT is to do thorough research and invest responsibly.
A study conducted by 360 Research Reports suggests that the global NFT market size is projected to reach $73 billion by 2028, from $15 billion in 2021.
As more and more people migrate to online spaces and life becomes more virtual, NFTs may actually have staying power.