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Time to talk about NFTs… This past year has been a really tough one for our beloved JPEGs.
In just the last year, the market cap of all NFTs has been cut in half, despite thousands of new NFTs being released during that time. 😨
Even worse, the crown jewels of the NFT market, the so-called “Blue Chips” like BAYC, Cryptopunks, etc., are tanking hard too… 😢
I'm aware that many of our readers at Web3 Academy got their start in crypto and web3 by investing in NFTs over the last few years, so these charts likely sting…
It’s safe to say that investing in crypto and web3 is not for the faint of heart.
You can earn A LOT of money in this space, but you can lose A LOT too. 💔
So the question is… did we just lose A LOT of money in NFTs?
Or, like crypto’s past, are we just in a “winter” after a blown-out hype cycle of a new innovation that will bounce back with vengeance? 🤔
Here’s some context: For those who weren’t in crypto during its last hype cycle back in 2016-2019, the novelty of launching fungible tokens on top of blockchains sent the market cap of crypto skyrocketing in 2017.
ICOs (Initial Coin Offerings) was a brand new use case for blockchains (specifically Ethereum) back in 2017 and it was the birth of many tokens that we know and use today.
That said, similar to NFTs over the last year, many people capitalized on the hype and launched tokens with no utility or business/product behind them, just a useless token based on hype.
When the hype settled, the markets tanked. 😥
Here’s a chart of the crypto market cap (excluding Bitcoin) in 2018.
The market cap of fungible tokens plummeted from $480 Billion to $40 Billion within 1 year. 🤯
Back then, many thought that tokens on the blockchain were dead and would never become a reality. It was all just a bunch of hype and scams.
Sounds pretty similar to NFTs today, doesn’t it? The chart above looks pretty similar to the NFT chart above too… 📉
But if I zoom out on that chart above, here’s what happened to the market cap of fungible tokens during the next few years…
The market cap skyrocketed from $40B up to a peak of $1.7 TRILLION over the next 3 years.
Of course, we are now in this cycle’s “crypto winter” where we sit at a market cap of $550 Billion… Still, it’s a nice 13.75x from the bottom of the crypto winter in 2018. ❄️
The question I’m poised to answer in today’s report is… “Will NFTs have a similar cycle to crypto?”
…and if NFTs aren’t dead ☠️, where are we at in this NFT cycle? Should you be buying or selling your NFTs? 🤔
Let’s dive into the onchain data and see where things are at today. 👀🔛⛓️
Today, fungible tokens are used to provide equity, governance, rewards, access, and much more across protocols and applications in web3.
However, back in 2017 during all the hype, these tokens barely had any purpose.
Today, most NFTs also offer very little value and, thus, have little fundamental value associated with them. If NFTs are to stage a comeback, they need to find product-market fit and have real users and use cases. 🎯
So let’s dive into the onchain data and see what’s happening across the NFT space.
If we look at wallets interacting with NFTs on NFT marketplaces, we can see that the numbers are trending lower. 📉
You might also observe that the total user base is minuscule, with less than 550,000 unique wallets interacting with NFT marketplaces last month (that’s likely under 175,000 unique humans!).
If we scrutinize volumes on NFT marketplaces, it also looks quite dire… 😧
Sure, it appears that volumes showed some revival in 2023, but we can see that the bulk of that came from the Blur marketplace, which isn’t real sustainable volumes, it’s simply airdrop farmers wash trading for the $BLUR token. 🗑️
The other metric we can observe is monthly trades on NFT Marketplaces, which after a free fall in April and May, seems like it showed some vitality in June. 🌱
However, after we delve deeper, we can see that in June we also saw a massive spike in wash trading (aka airdrop farming) which would explain the spike in monthly transactions. 😨
The users, volumes, and transactions are heading in the wrong direction and are likely even worse than the numbers often shown in headlines, as the bulk of these numbers can be attributed to wash trading.
However, the one point that I should emphasize on, from the analysis above, is that if we compare June 2023 to June 2021, it’s still a 10x in unique monthly active users, which is very impressive. 👏
What’s even more impressive is that if we disregard NFT marketplaces and simply look at monthly active wallets interacting with NFTs, then we can see that in June we actually hit all-time-highs! 📈
This suggests to me that although trading expensive NFTs is in a big downturn, the fundamental utility of the NFT technology has staying power. 💪
If NFTs were to ever stage a comeback, this is absolutely vital. And to accurately determine that, we indeed need to see where all this activity is originating from. 🕵️
To pinpoint the source, we start by breaking down what blockchain these active wallets are from. 🔍
Of course, the biggest contributor to the new wallets interacting with NFTs is Polygon, who hosts many of the biggest brands in the world.
For example, Reddit has 500,000+ new wallets/week interacting with NFTs and it’s showing no signs of slowing down! 🤯
The other standout above is the blockchain “Gnosis Chain”, which is generally not associated with NFT activity. For some reason, Gnosis had 6.9 Million unique wallets interacting with NFTs in June, whereas the month before that it had only 160,000 wallets. 😲
We couldn’t identify if this activity was real (or where the wallets came from), and didn’t receive a response from the Gnosis team either, so let’s assume that this activity is fake (or perhaps some sort of test).
Even so, if we subtract the 6.9 Million wallets on Gnosis Chain from the June totals, we still hit all-time-highs!
This is an extremely bullish sign for the future of NFTs and shows that it's highly likely that NFTs are NOT dead. 🚀
So how can we be at all-time-highs in terms of users of NFTs, yet the market cap and price of NFTs are still making new lows?
There are 2 main reasons:
This was also a fact with the tokens that debuted back in 2017 during the hype cycle. 99% of those tokens did not achieve all-time-highs during this cycle, even though the total market cap escalated from $40 Billion to $1.7 Trillion.
Only a select few tokens that were launched back in 2016-18 ever reclaimed their all-time-highs in this past cycle.
For some context, here’s an intriguing comparison. Below is a list of the top 15 tokens in the last cycle. 📊
And now we have the top 15 tokens currently. Of the best 15 tokens from the last cycle, only 7 of them still hold a place in the top 15.
Of those 7, only Bitcoin and ETH are significantly priced higher than the last cycle, and 2 of them ($XRP and Litecoin) are priced below their 2018 price!
So even though the crypto market has rallied and grown significantly since then, only a few tokens have reached previous all-time highs and grown substantially since then.
The same will be true for NFTs of this cycle. Here’s the current leaderboard for context: 🏆
Now, can you guess which type of tokens weathered the last “winter” cycle?
Tokens that represent real products and businesses that solve genuine problems for users!
For example: Maker, who devised one of the most successful applications on the blockchain to date - the ability to use your ETH as collateral and take out a loan in the form of a decentralized stablecoin: $DAI 🛠️
Other “blue chips” like Synthetix, who built and shipped throughout the bear market, were able to recover too. 🚀
It’s likely that the same will hold true for the NFT space. When the next cycle for NFTs arrives, 99% of NFTs from 2021-22 will not regain value, however, a select few who construct something of true value will make a comeback. 🥊
It’s still too early to predict which NFTs will succeed, we need to see more of them launch real products and businesses to understand which will prevail.
Remember our crypto money flow chart? ♻️
NFTs are the farthest on the risk curve. We believe that we are just entering the first phase of the crypto cycle, which means that liquidity is just starting to flow back into markets.
When that initial injection of liquidity enters the crypto market, it doesn’t migrate into high-risk assets, it starts with the large caps like BTC and ETH and moves its way down the risk curve over time.
Here’s the TL;DR on liquidity cycles that will greatly help you understand market cycles (in crypto/NFTs and elsewhere).
When interest rates rise and central banks cease printing money, it signifies that less liquidity (aka money) is available to purchase assets.
In January 2018 (the peak of the last crypto cycle), interest rates ascended above 1% for the first time since the financial crisis. 💹
This resulted in liquidity abandoning “risky assets” like crypto and moving into cash or other “safe” assets.
That’s exactly why we witnessed the downward trajectory of the crypto market from 2018 in the chart I exhibited at the start of this article.
And why we noticed liquidity leaving the crypto markets again in 2022 (correlate it with the increased interest rates in the chart above in 2022) 💸
NFTs, however, are different from crypto. They are less liquid, so the capital exits the market at a slower pace.
This is why NFTs reached their peak in Q2 of 2022 rather than November 2021. ⏱️
Interestingly, you can match the NFT market exactly to the Rolex market (high-end watches), which peaked at the same time. ⌚️
Again, that’s because Rolex watches are less liquid and thus, take longer to sell than crypto or stocks.
Rolex watches or other luxury goods are an apt comparison to NFTs in their current state as most NFTs today are a “luxury/status” type asset.
These types of assets also move according to global liquidity conditions, however, they generally lag versus stocks or other more traditional investments. 🌍
Picture this scenario:
An investor buys stocks and as liquidity enters the markets their stocks appreciate.
The investor feels richer than previously (whether they actually are depends on if they sold),
As a result, the investor purchases more expensive things like Rolex watches (humans are greedy and desire status).
As liquidity exits markets due to the business cycle, stocks begin to plummet
The investor now feels poorer than before and needs liquidity
The investor sells their Rolex watches.
And this virtuous cycle continues on and on and on…
I hope that my explanation above gave you a good overview of how the NFT cycle works.
While we’re still super early, the tendency for the NFT market is to lag behind the crypto (and stock) market.
That’s because the people who want digital/physical goods for status or luxury (like NFTs or Rolexes) are the people who feel/become rich during the bull market.
And that’s why our Money Flow in Crypto chart lists NFTs as the farthest down the risk curve. It’s where the money will flow last.
Capital will funnel into BTC and ETH first (this is our current phase), and then in the forthcoming months to year, capital will traverse down the risk curve into application tokens and subsequently NFTs.
In my opinion, we’ve likely bottomed out in the NFT market, or at least are on the verge of bottoming out (it could intensify as BTC and ETH appreciate too as NFT holders FOMO back into those assets).
I believe this because the liquidity cycle has reached its lowest point and we are now on the rise!
If you have a deep understanding of NFTs and can identify the solid projects which are building authentic businesses and products, then the upcoming months will likely be an opportune time to buy them at their lows.
That said, comprehend that 99% of the NFTs that exist today won’t reclaim the prices they held in 2021-22, so proceed with caution!
Join us next Tuesday for an exclusive PRO member AMA.
Our web3 wizards, Kyle and Jay, are here to demystify the tech, ease your mind, and remind you that there's no judgment here!
What: No Stupid Questions in Web3 - AMA with Kyle & Jay
When: Tuesday, July 25th at 12:00 pm EST
Where: #pro-meet-up — Token Gated Discord Channel
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Thanks for reading. And remember, you're strong, you’re powerful, you’re alpha! ❤️
See you soon. ✌️
Kyle Reidhead
Founder of Web3 Academy and Impact3
Find him on Twitter
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Disclaimer: This article is for informational purposes only and not financial advice. Conduct your own research and consult a financial advisor before making investment decisions or taking any action based on the content.
