What Does The Rest Of 2022 Have In Store For The NFT Market?

Key Points

• A deterioration in global economic/financial conditions has hit the NFT market hard in the first half of 2022.
• Despite poor price performance, NFTs have continued their march towards the mainstream as creators capitalize on new use cases.
• While some NFTs risk falling under US SEC purview, most are likely to remain unregulated for the foreseeable future.

The NFT Market’s Ugly Start To 2022

In many respects, conditions in the marketplace for Non-Fungible Tokens (NFTs) has deteriorated quite severely. After weekly NFT trading volumes nearly hit $1.0 billion in August 2021 according to CryptoSlam data, weekly trading volumes have been consistently below $50 million since mid-May, the worst since early 2021, prior to the first major explosion in the NFT market.

Meanwhile, after the number of weekly NFT sales surpassed 1 million on a few occasions in 2021, according to CryptoSlam data, these numbers have also plummetted in recent months. So far this week, there have been less than 150,000 NFT sales, also at its worst level since early 2021.

The deterioration in market conditions recently is evident when looking at the recent fall of the price floors of the most popular NFT collections. Take the world-famous Bored Ape Yacht Club (BAYC) NFT collection (of 10,000 cartoon apes). As of Sunday, the price floor (i.e. the cheapest BAYC NFT currently on the market) was around $132,000, down from over $400,000 as recently as late April and at its worst level since October 2021.

Meanwhile, the price floor for one of the 10,000 CryptoPunk NFTs, one of the first to tap into the idea of a social media profile picture as a collectible digital item, was last around $74,000, its lowest since early 2021.

Deteriorating Global Economic/Macro Conditions Largely To Blame

The recent poor performance of NFTs and deterioration in market conditions is unsurprising against the backdrop of an ongoing, still worsening cryptocurrency bear market. Digital assets, which are still seen by traditional investors as highly speculative/risk-sensitive assets, have been taking a beating amid a deterioration of global economic conditions in 2022, as well as a tightening of global financial conditions.

In other words, inflation remains sky-high across many of the world’s major economies (such as the US, UK and Eurozone) and this is pushing major central banks towards tightening monetary policy (i.e. rate hikes). Tighter financial conditions tend to hurt risk-sensitive assets (like digital assets) as excess liquidity is drained from the system and the opportunity cost of not being invested in safe-haven government debt assets rises (i.e. as bond yields rise).

All the while, sky-high inflation, the outbreak of war between Russia and Ukraine and recent lockdowns in China amid its ongoing zero Covid-19 approach are denting global economic growth. Many expect a recession in major global economies within the year.

NFT Adoption Set To Continue As New Use Cases Gain Traction

The above might sound all doom and gloom. And for the owners of NFTs from some of the industry’s most well-known collections, the outlook for a significant price rebound doesn’t look good in the absence of a major improvement in global macroeconomic conditions (the same can be said for all crypto holders).

But taking a look under the hood, industry trends remain resoundingly positive, suggesting the NFT market’s long-term outlook remains strong. Since the start of the year, most major social media companies have begun making moves to bring NFT functionality to their goliath Web2 user bases.

Facebook and Instagram, both owned by Meta Platforms, are readying features that would allow users to display NFTs as their profile pictures and mint new NFTs in platform. Twitter has also unveiled a new NFT profile picture verification feature, while Linktree has integrated various NFT features to allow users to stylize their pages.

Scores of companies have launched/announced plans to launch NFT marketplaces. While OpenSea remains the industry leader, Sotheby’s, Shopify and Gamestop have all launched NFT marketplaces.

OpenSea and Coinbase both, meanwhile, want to lower the hurdle to NFT ownership by enabling their purchase through direct fiat payments, with Mastercard recently announcing it is working with various Web3 companies to provide a similar offering.

Meanwhile, Meta Platforms has announced that it wants NFTs to be a key part of its fledgling metaverse, with users able to mint and exchange NFTs within the platform.

Elsewhere, celebrities are queueing up to release NFT collections that allow them a new way to connect with fans. Celebs including Kanye West, Billie Eilish, David Beckham, The Notorious BIG’s LLC and Chuck Norris have all filed for NFT trademark applications with the US Patent and Trademark Office.

Bela Hadid is reportedly set to soon drop her CY-B3LLA collection of 1,111 NFTs, with collectors reportedly set to get access to meet Hadid in person in locations all over the world, amongst other benefits. NFT sales look set to become a ubiquitous feature of celebrity/artist/creator relations with their fans.

Additionally, NFTs are becoming an increasingly popular way for non-profit/charitable organizations to engage with potential donors and raise funds for their causes. Australia Zoo this year announced its Wildlife Warriors NFT project, with all proceeds from sales set to go towards funding the zoo’s conservation efforts.

Meanwhile, the World Wildlife Foundation (WWF) has this year launched its Non-Fungible Animals project to raise money for the conservation of ten animal species on the brink of becoming extinct. The WWF will release one NFT for each of these near-extinct animals thought to still be alive and had reportedly already raised nearly $300,000 by early May.

NFTs have also been used to raise funds for other causes such as support for those affected by Russia’s invasion of Ukraine. For example, within just a few days of the start of the war, the newly set-up UkraineDAO had raised upwards of $7 million in via NFT sales.

Separately, NFTs are increasingly gaining traction in the place of tickets, membership passes and utility tokens. For example, take self-help guru and famous entrepreneur Gary Vaynerchuck and his VeeFriends NFT collection.

Owning a VeeFriends NFT means access to Gary Vee’s various online communities (such as his Discord group) and his annual NFT/Web3-focused conference called VeeCon.

Alternatively, take NFT platform OneOf’s upcoming release of its OnePass NFTs. Buyers of the token will in the future be granted early or exclusive access to numerous upcoming NFT drops on OneOf’s platforms. OnePass NFT holders will also receive four free NFTs per year, plus further exclusive giveaways.

While 2022 hasn’t exactly been a year of positive price performance for NFTs, it has seen major strides forward in terms of the adoption of NFTs and their related technology into the societal mainstream. Expect this trend to continue into 2023 and beyond.

When global macro conditions turn positive, it would be at all surprising to see NFT prices rebound significantly and even post fresh record highs. If inflation begins to abate later this year, giving central banks the room to ease policy, this could be a story for 2022.

If not, NFT bulls may have to wait until 2023. But so long as industry trends remain positive, many think the rebound is more a question of when not if.

NFT Regulatory Scrutiny?

Of course, when NFTs venture into the territory of guaranteeing the owner monetizable future benefits, they risk foraying into the territory of becoming securities.

Sources from inside the US Securities and Exchange Commission (SEC) told Bloomberg earlier in the year that US regulatory agency is keen to investigate illegal digital token offers and to see whether NFTs should be considered securities. The agency has been badgering various NFT creators, marketplaces and crypto exchanges in recent months with subpoenas to collect information.

“Given the breadth of the NFT landscape, certain pieces of it might fall within our jurisdiction,” SEC commissioner Hester Pierce said in an interview with CoinDesk earlier in the year. “People need to be thinking about potential places where NFTs might run into the securities regulatory regime,” she added.

Pierce is referred to as the SEC’s crypto mom by many within the Web3/crypto community owing to her (usually) pro-crypto stance.

If the SEC was to deem a certain portion of the NFT market as falling under its regulatory purview, which could in the short-term hobble growth, most of the NFT space seems “safe” (from regulation) for now.

For example, Senators Kirsten Gillibrand and Cynthia Lummis this week released a much-anticipated bill that would aim to implement broad regulations across the cryptocurrency space. The bill, which marks the first major attempt by any US lawmakers to regulate crypto, did not have much to say on NFTs.