The NFT Market Crash and the Risks Associated with Following Online Trends
Introduction
A recent report produced by dappGambl indicates that 95% of Non-Fungible Tokens (NFTs) have nosedived in value, with a market cap of 0 Ether (a popular currency used to facilitate transactions on the Blockchain) rendering them essentially worthless. Consequently, it is estimated that 23 million people now have worthless investments. This is a stark contrast to the prices these digital assets achieved in 2021 when they took the world by storm.
What are NFTs?
NFTs can be seen as a form of receipt. They provide proof of ownership over a digital asset on the Blockchain. This may include – although it is not strictly limited to – images and videos.
The first NFT, named Quantum, was created by Kevin McCoy in 2014. However, these digital goods truly became a global sensation only in 2021. Since, various celebrities have attempted to profit from the popularity of NFTs by creating their own range of digital goods. Examples include Paris Hilton, Eminem and Tony Hawk.
Additionally, some companies strived to cash in on the captivated market, including video game publisher Ubisoft. Ubisoft actively encouraged game developers to incorporate crypto goods in their titles in 2021 and 2022, whilst the trend was at its peak. Contrary to the objectives, this was received negatively by the overwhelming majority of consumers, leading to the publisher ultimately distancing itself from the idea of implementing NFTs in their video games.
Why did NFTs Become Popular?
The rise in popularity of NFTs is largely attributed to famous internet personalities promoting the virtual items. When online influencers, as well as sports stars such as LeBron James, released their own collections of NFTs, the popularity of such crypto assets soared.
Alongside celebrities promoting their digital tokens, contributing to the frequent sale of NFTs for large sums, everyday people also sought to profit from the craze. The transactions are mobilised via the Blockchain – a de-centralised public ledger that documents cryptocurrency transactions. NFTs (and cryptocurrency generally) were marketed as an accessible means of trading. This accessibility meant that anyone could attempt to capitalise on the trend, naturally increasing its popularity.
The most expensive NFT to date, named ‘The Merge’, was sold for $98.1 million in December 2021. This sum strongly contradicts today’s stagnant market. There are multiple reasons which may have contributed to this dramatic downfall.
Why have NFTs Depreciated in Value?
One underlying reason behind this depreciation is the widespread availability. For example, physical assets, such as property, derive their value from scarcity. Unlike physical goods, NFTs can be produced frequently; in a short amount of time, with no real, discernible qualities to differentiate them. This results in no shortages for potential investors.
Furthermore, NFTs have a lack of utility. Again, this can be juxtaposed against the property market. The demand for houses will never cease completely, especially as the population continues to rise exponentially. Conversely, digital goods are limited in practical terms, even in the digital sphere.
Finally, the NFT market crash may have been motivated by the numerous scams that have operated in the last two years. It provided an opportunity for online personalities to use their platform for nefarious purposes.
One of the most notorious methods of scamming is called a ‘rug pull’. The strategy involves a crypto project which is endorsed by a famous person or people to draw in investors. With an influx of people interested in the coin, large amounts of money are pumped into the asset/currency. Eventually, the team behind the project disappears with the profits, leaving investors financially devastated. According to estimations by Chainalysis, rug pulls relating to unlawful activities accumulated to $2.8 billion in 2021 alone.
How are Crypto Assets Regulated?
In the UK, the primary financial regulating body is the Financial Conduct Authority (FCA). The FCA, inter alia, is tasked with monitoring the activity of firms releasing assets online. This includes ensuring that firms have the necessary anti-money laundering and terrorist financing procedures in place. Additionally, the UK Advertising Standards Agency (ASA) supervises the advertising of crypto assets on social media. Besides these measures, crypto assets remain greatly unregulated.
Moreover, the wide variation of anti-money laundering regulations between jurisdictions results in no standardised rules imposed on crypto firms. This is exacerbated by the fact that several jurisdictions are yet to implement any regulations surrounding virtual goods. Until international standards materialise, greater investor vigilance is likely, reflecting apprehensions over a potential crash.
Conclusion
The market crash of NFTs is likely to remind eager investors of the uncertainty and unpredictability. On the other hand, this can be seen as a reflection of the natural course of trading. Markets and trends shift frequently, and existing limited regulations may lead to detrimental consequences.
It remains to be seen whether NFTs can recover from their fall from grace. If other forms of digital assets are here to stay, legislators worldwide are expected to strive towards further regulations to mitigate fraudulent trading.
By Alexander McLean