NFTs or Non-Fungible Assets have been rising in value and popularity over the past year. With the help of various celebrities endorsing them, the industry has grown to a multi-billion dollar standing. With the recent crash in Cryptocurrencies, there is speculation that NFTs could well be next to feel the onset of a bear market.
NFTs are in the form of tokens with a link to digital images. These “collectible” items range in type but can be avatars in video games, virtual property, or tools, and objects that appear in the newly developing virtual world of the metaverse.
With a popular following in the world of celebrities, stars like Eminem and Serena Williams have bought NFTs. Even Paris Hilton owns NFTs, and this association with celebrities has persuaded many younger people to take a gamble on the assets in the hopes of seeing a rapid profit.
Are They A Safe Investment?
Virtually all investment sectors, in general, are all suffering a downturn currently, dropping values are commonplace for Cryptocurrencies which were for so long seen to rise with staggering speed. Indeed the value of the larger Cryptocurrencies like Bitcoin and Ether has seen their own values drop back to the levels seen in late 2020. In the world of digital investments, “safe” is always going to be a relative term.
There are signs that the same bear market that has gripped Cryptocurrencies is now reaching NFTs. This is evident when you look at figures on the volume of trade produced by the analysis firm Non-Fungible. They show that trading volumes have reduced in the first quarter of 2022 by almost half when compared to the last quarter of 2021. Although the firm put this down to the market being flooded with the volume of NFTs created previously and the resale market just gaining momentum.
Some signs are there to be seen like the NFT created using Twitter creator Jack Dorsey’s first tweet. The NFT sold by Dorsey for close to $3 million only last year has been unable to secure a buyer willing to pay more than $20000.
Problems Faced By The NFT Industry
It is probable that the downturn in NFTs may have sources other than the downturn in Cryptocurrencies like the increasing skepticism created by high-profile scams that have emerged, or simply people showing restraint with looming cost of living increases forecast.
The industry is facing a customer confidence issue highlighted by OpenSea making the stark announcement in January that 80% of all the NFTs created using its free online tools were in fact fraudulent. Some were reproductions of legitimate artworks but produced without the needed permissions, others were just blatant copies of other NFTs and worthless. Similar problems have befallen LooksRare, another NFT exchange that has produced high volumes of sales. According to data released by CryptoSlam, only 5% of transactions on the platform appear to be genuine. This was in some way through mistakes in LooksRare’s business model that let individual users sell their own NFTs to themselves and rewarded them with tokens for doing so.
NFTs have not been without their fair share of scams and resulting scandals. This came home with a crunch for the popular game Axe Infinity which lost a staggering $500 million in one scam – quite something for a game enjoyed by millions of people.
This scam highlighted one of the biggest problems for the police forces around the world when dealing with NFT fraud. It applies to both cryptocurrency and NFT markets, which are popular due to the lack of the kind of government regulation we see with gambling sites. But this lack of regulation leads to law enforcement agencies having a hard time responding to fraud using the existing laws at their disposal.
With appropriate regulation, NFTs could develop securely and customer confidence would bounce back knowing their assets were protected by a competent and suitable framework of laws. Other schools of thought bring the idea that the lack of regulation afforded to both Cryptocurrencies and NFTs is one of the key reasons people choose to invest in them and one of the reasons they can bring large profits so quickly.
The link in people viewing NFTs like they do art is down to the similarity of NFTs having no real-world use and their values being based on market trends. Olivier Lerner the co-author of “NFT Mine d’Or” (NFT Gold Mine) has suggested those seeking profits with NFTs have more in common with a lottery game.
World Economic Stability
The future of NFTs may have as much in common with the world’s general economic trends which are currently seeing countries facing an increased cost of living and rising inflation. This has been attributed to the Ukraine war and the changes in how the countries of the world trade with one another. At the top of complications in the world, trade is those of energy supply. With some serious changes now in place, with further change yet to come this is leaving some countries with rapidly increasing energy prices and this is having a direct effect on the cost of living. With less disposable income it is to be expected that normal people are being very reserved with the investments that they make.
As with Cryptocurrencies, NFTs have no intrinsic value, like the value associated with conventional stocks and shares that have an actual worth backed up by the assets and value of the company that issued them. This is one reason why NFTs don’t currently provide the smaller investor with a tangible asset that can be seen as stable. It may be that to survive the NFT sector will need to address the topic of legislation to provide further security for the investors they hope to attract in the future, but as of now the marketplace has few rules or regulations and only experienced investors who have in-depth knowledge should feel confident of their understanding of the newly unfolding market.
As the year progresses more information on the NFT marketplace will emerge and to what extent they have followed the downward trend currently set by Bitcoin and other Cryptocurrencies.