How many times do you go back to your Phantom or Metamask wallet and look at all the NFTs you bought back in late 2021/early 2022? I do it seldom now because I simply have to move on, a sentiment most of you also agree with. I recently went through my collections and was not disappointed by my observations since they were within my expectations. I did not expect the amount of NFTs I held without a market value. Most of my collections are worthless while the rest are worth the floor price, a certain heavy loss if I sold now. So what's the issue with NFTs? Why would a market worth $2.8 billion monthly trading volume flatline to a weekly trading volume of $80 million in July 2023, just 3% of its peak?

DappGambl reported on the worthlessness of 95% of the NFT market recently. Their report cited a key issue facing the NFT market: Excess Supply and lack of demand. With the craze of that period, different creators were shilling out NFT projects with at maximum, 10k unique "jpegs". from economics, it's known that an excess supply matched with a dwindling demand quantity will lead to the over-saturation of the market. The depreciation in the price of the NFTs follows as the market seeks a demand zone. Left to deal with worthless “digital art” which cost us a lot, looking into the reasons behind this fall can equip us all with the knowledge to prevent a repeat of our mistakes, after all, “those who forget history are doomed to repeat it”- George Santayana.

The NFT market became proliferated with scam projects shilled by dubious influencers who used their audiences as “exit liquidity”. So many people bought NFTs thinking they were going to flip them, but cannot even sell for a loss now. Trust was broken and confidence waned thin. Traders are careful now, especially around new NFT projects shilled by influencers. Another reason for the apparent downfall is the illiquidity of the NFT marketplace. NFTs cannot be traded equally for another NFT, hence their non-fungibility. It can be very difficult to buy and sell NFTs, and there is often a wide spread between the bid and ask prices. This makes it difficult for investors to get in and out of the market, and there is a lack of accurate valuations placed on NFTs.

These problems were sure to arise due to the nature of the NFT market, however, they aren’t the real reason behind the NFT collapse. It’s much more complex than scams and illiquidity, yet it has always played out in the crypto space and continues to play out, even till tomorrow. Just as I stated at the start, NFTs were at their peak during late 2021/early 2022. It was the season of NFTs and GameFi when $MANA and $SAND did crazy multiples. Everything started when Facebook changed their name to Meta because they wanted to focus on a larger market that includes Web3. This is called a CATALYST and NFTs/GameFi are the NARRATIVE. These concepts are responsible for the “death” NFTs have experienced.

Narratives and Catalysts

The early crypto market has always been driven by stories, events and milestones that garner hype and interest around the next best thing. Everyone always rushes the new and shiny toy, forgetting about the old ones. Catalysts push the hype while narratives are the stories people believe because of the catalyst, forming before or after the event in view, since it's based upon knowledge of the event and not the occurrence of the event.

Some past narratives we have seen include:

Memecoins mid 2021 (Safecoin and Dogecoin)
Alt Layer-1s in mid-2021 (the rise of Solana and ETH EVMs)
AI in late 2022 (the introduction of ChatGPT)

I know it sounds confusing, but think of the popular saying “Buy the rumour, sell the news”. It works in that same vein, the knowledge of the event causes euphoria, which climaxes right before the event occurs, while the actual occurrence of the event sees the hype die down and eventually flatline. I’ll use the NFT narrative as a case study.

Case Study: NFTs - into the Metaverse

The Background: In 2021, a new decentralized product was conceived, a way to identify a picture’s ownership on the blockchain. This would later extend to music, documents, tickets, edges etc and would become the new wave that would get everyone’s adrenaline pumping. NFTs were born and a new landscape was ready to be discovered.

This forms the background of the case study. It was a new product in DeFi that everyone wanted to understand, explore and profit from. The Sandbox and Decentraland were two of many projects that were built around NFTs and decentralised gaming. Look at their respective price charts below, you can see a clear point (Month of October) where they shot up in price. This was caused by a catalyst: Mark Zuckerberg

The Sandbox Price Chart. Data from Binance

Decentraland Price Chart. Data from Binance

The Catalyst: On October 28, 2021, Mark Zuckerberg, in a keynote speech during a virtual event, announced that Facebook would undergo a rebrand under a new name, Meta. This move was to position the company in the metaverse and expand its range and audience. This single event sent the entire space into delirium, everyone was talking about it, and tokens associated with the metaverse blew up in price. $SAND and $MANA were the projects that benefitted the most from this catalyst. Below, the impact Mark’s announcement had on their prices can be seen.

The Narrative: The prices of the earlier mentioned tokens jumped to all-time highs in preparation for the amount of money that was to flow into metaverse-based tokens. NFT projects raised their floor prices so quickly that they sold out. Go through any famous NFT collection and check for the price ATH, you'll notice that it falls within this period that we are discussing. Everything was perfect, the market was swelling up as the hype kept on inflating it, almost like a balloon.

Balloons Burst

Why did this expanding market suddenly contract to the point that nobody remembers it? Another narrative was born. Just like I said, in the crypto space, people move on too quickly to the next fad or shiny toy. Liquidity is always flowing out of one thing and into another. With the $LUNA crash mid 2022, people got scared and began withdrawing their money. Another event that occurred was the development of other up-and-coming blockchains like $APTOS, and DeFi projects like $WIGO.

These factors led to 95% of the NFTs identified to have a market cap of 0 Ether and 23 million people whose investments are now worthless (including me), according to DappGambl. You see narratives shift always in this space, and money movies with the narratives. The narrative shifted and Non-Fungible Tokens became the Non-Forgettable Tokens, the meme below perfectly explains what has happened to NFTs.

It’s not enough to put money into something and hope it pops off, you need to understand what the general view of the market is on that thing. Is it the new wave, is it old fashion, or has anything new come out since then? These are some of the questions you should be asking

Here are important things to note about narratives and catalysts::

Just because a project is good, doesn’t mean it’s the right TIME to invest.
Fundamental analysis can help you determine which projects have the foundations to do well, but narratives determine WHEN their prices will appreciate.
Capturing narratives can be challenging since they can shift very quickly in crypto.

If you paid attention you'd know that there were a few narratives that pooped out this year:

Artificial Intelligence.
LSDs - Liquid Staking Derivatives
ZKRollups
RWAs - Realm World Assets etc.

NFTs will make a comeback during the next bull run because money always recycles back to past narratives, so some of the NFT collections (hopefully mine as well) will regain value again. All that's required is that we wait patiently and prepare for the run.

Till next time.