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Non-fungible tokens (NFTs) are increasingly popular among both crypto investors and artists. Each NFT asset is completely unique, which is what creates its value. Just as with any market, however, it's possible for a bubble to form when prices become so inflated that buyers can no longer justify their purchases. When this occurs, prices can drop substantially in a short period of time as the result of insufficient numbers of buyers and a surplus of sellers. In this guide, you'll learn everything you need to know about an NFT bubble — and whether it’s already burst.
An NFT is a cryptographic asset that's positioned on a blockchain, consisting of distinct metadata and identification codes. Every NFT that's minted is thus unique, which gives the asset its value.
An NFT can't be exchanged or traded for any equivalent NFT. In comparison, cryptocurrencies and other fungible tokens can be traded for one another and used in commercial transactions. NFTs typically represent artwork, digital real estate in virtual worlds and real-world items.
Tokenizing these assets enables them to be traded, bought and sold efficiently. Prices for most NFT collections were at their highest in early 2021. Though prices have since dropped — after the initial surge spurred by Bored Ape Yacht Club and similar NFT collections — the NFT market is still relatively healthy.
An NFT bubble occurs when the price for digital assets increases as the result of increased speculation among investors. If NFT values increase too quickly, their prices will likely crash following the initial hype.
It's common for NFT bubbles to take place when newer investors enter the market. Typically, investors will drive prices up based solely on hype, because they don’t have a thorough understanding of what they’re investing in.
An example of a small NFT bubble took place in January 2022, when a computer science student placed 1,000 deadpan selfies on OpenSea, then the largest NFT marketplace. Initially listed at $3, each NFT peaked at $1,200 (the equivalent of 0.4 ETH at the time), resulting in earnings of $1 million for the enterprising young man.
Another example occurred in March 2021, when Sina Estavi, the CEO of Bridge Oracle, purchased an NFT of Jack Dorsey's first tweet. The Wall Street Journal reported that Estavi paid $2.9 million for the NFT, and that he tried selling it on OpenSea for $48 million. However, most of the bids he received were in the hundreds.
As the NFTs had no utility at all, yet increased in value at such a rapid rate, this begs the question: Were these NFT bubbles? They were.
There are several signs that indicate an NFT bubble is bursting. Buying NFTs — or any type of cryptocurrency — can be risky, which is why it's highly recommended that you know the signs. The main ones to look out for include everything from NFT prices falling drastically or reduced volume, to subsiding media coverage surrounding NFT sales and the overall NFT market.
When NFT prices have begun to fall by a considerable amount, it’s the first sign that an NFT bubble is getting ready to burst. Since NFT prices tend to fluctuate, it’s wise to be cautious when you notice them dropping throughout an already highly volatile market. In addition, an NFT bubble doesn't automatically burst when prices drop; it could be a more prolonged process.
Among the most important indicators of the NFT market’s health is its daily trading volume. When trading volume drops for a lengthy period of time, it's possible that the NFT bubble is about to burst.
If people are starting to place their NFT collections on the market for sale, it may indicate a scenario where there are too many sellers and not enough buyers. In this case, it's likely that the NFT bubble will burst since there's nothing to keep their prices from decreasing.
Another sign that the NFT bubble is about to burst involves reduced NFT media coverage. When there’s plenty of news about the most popular NFT collections and sales, NFT prices are generally increasing. If media coverage begins to slacken, it’s probably a sign that the NFT bubble is getting ready to burst.
Since the peak of NFT prices in May 2022, OpenSea’s NFT market has experienced a drop of 99% in transaction volume, which means that the NFT bubble has burst. Keep in mind that OpenSea is one of the two largest NFT marketplaces, which is why performance on this market matters to the broader NFT industry. During May 2022, OpenSea processed more than $2.7 billion NFT transactions. At the end of August 2022, trading volume for NFT sales had dropped all the way to $9.34 million.
It's believed that the drop in NFT values is tied to the recent crash in the crypto market. However, some cryptocurrencies have begun to rebound — which might be what will happen with NFTs. While there are too many sellers and not enough buyers at the moment, the NFT market could become more balanced in coming months. Even though it's likely that the NFT bubble has burst, this doesn’t mean that prices won't increase.
The very first NFT to be minted was created by digital artists Kevin McCoy and Anil Dash in 2014. However, the broader market would remain relatively small until the launch of the online game known as CryptoKitties in 2017. Formed on the Ethereum blockchain, it showed investors that video game NFTs were viable.
CryptoPunks is another popular collection of digital assets that was made available in June 2017. Developed by Matt Hall and John Watkinson, this collection consists of 10,000 unique characters that were minted for free. While the collection didn't immediately gain any traction after launch, all of the NFts quickly sold out. At the beginning, they were being sold for just a few dollars. Now, CryptoPunks NFTs are worth thousands of dollars apiece.
While the NFT market was relatively popular for several years, it wasn't until 2021 that the market exploded. During 2021, the trading volume for the year amounted to $17.6 billion, which marked a 21,000% increase over the previous year.
The Bored Ape Yacht Club collection was among the most popular collections when it was released in April 2021. Its popularity was also boosted by celebrities such as Paris Hilton and Snoop Dogg when they purchased a Bored Ape NFT each. A more recent NFT collection, Okay Bears, is represented by 10,000 NFTs minted in late April 2022 at 1.5 SOL each; the floor price is currently 70 SOL apiece.
NFT prices were steadily rising from 2021 until January 2022, when NFT sales on OpenSea were well over $4 billion in total value, their highest monthly trading volume to date. However, sales began to decrease shortly thereafter, and in February the trading volume dropped to around $3.75 billion. In March, the trading volume fell even further to $2.25 billion.
While these declines were relatively steady in the few months following January, prices throughout most of the market dropped sharply in May for NFT collections like Bored Ape Yacht Club, Azuki and CryptoPunks. For instance, the Azuki NFT collection’s value dropped by nearly 50% from May 8–14. The Bored Ape Yacht Club collection experienced a 28% drop in price during the same time period. Similar drops occurred with CryptoPunks and the Mutant Ape Yacht Club collections.
It's likely that the popularity of NFTs dropped because of market sentiments around cryptocurrencies. For instance, Bitcoin dropped from $36,000 on May 4, 2022 to just under $29,000 by May 11. This drop in NFT popularity indicates that the NFT bubble is bursting.
NFTs are almost certainly losing some of the inflated value they had in 2021 and into the beginning of 2022. However, this doesn't mean that they’re no longer valuable. To gain a better idea of why the NFTs experienced a fall in trading volume, let's take a look at the broader financial markets.
Throughout 2022, crypto values have dropped considerably as the result of the TerraUSD and LUNA market crash. In November 2021, Bitcoin was valued at $67,000 per coin. By late January 2022, its value had more than halved. While it reclaimed some of its value in the following months, further drops would occur in May and beyond.
Meanwhile, an NFT curated by Snoop Dogg for the ETH equivalent of around $32,000 was put up for auction at $25 million. However, on May 3, 2022, the highest bid that the NFT received was just 0.0743 ETH, which is around $210. It's clear that these digital assets are no longer selling for what they once were.
Despite the recent drop in NFT values, the future of NFTs is promising. According to Gartner, a technological research and consulting firm, it's estimated that around 25% of people will eventually spend one hour or more every day in the metaverse by 2026, and that NFTs and crypto will be the basis for the virtual economy inside the metaverse. As NFTs become more entwined in people's everyday experiences, their value should increase correspondingly.
The future of these digital assets is secured in part by the belief that social tokens and utility tokens will become increasingly popular. Social NFTs, like social tokens, are designed to provide digital artists with the opportunity to create unique digital collectibles that represent their likenesses.
Social NFTs give content creators the means to better connect with their fans. Because of the ever-increasing popularity of social media platforms such as TikTok and Instagram, Social NFTs should also increase in popularity in the following years.
Even though the NFT bubble has likely burst, NFTs are still much more popular than they were in 2020. The meteoric growth of the NFT market has led many artists and investors to discuss the possibility of creating utility tokens with potential use cases for NFTs.
NFT tokens are inherently unique and are already being used to transform how people play and interact. Utilities for NFTs could involve rewards, owner rights or certain privileges. For instance, a thousand unique NFTs could be provided as a means of entry to a concert.
It's likely that the NFT bubble has burst. Of course, another NFT bubble can still develop in its place. While most NFTs have dropped considerably in value throughout 2022, many NFT collections of digital assets are still highly valuable. In the real estate market, prices tend to slowly increase after a bubble bursts. The same may be true following the bursting of an NFT bubble. It's entirely up to you whether you hold or sell your NFTs. Either way, we’d recommend performing sufficient research before you make a final decision.
The rapid rise in the daily average for NFT trading volumes that occurred in 2021 marked the formation of an NFT bubble that has recently burst. While the initial surge of the NFT market has since cooled, NFTs are still popular among crypto investors. Make sure you're aware of the warning signs of an impending NFT bubble burst so that you can react quickly before it does.