Will NFTs survive the crypto bear market?

Prices in the millions and viral followings have brought non-fungible tokens into mainstream focus during the last few years. But the current market for NFTs — which use blockchain to mint one-of-a-kind versions of digital artwork, sports memorabilia, photographs etc. — couldn’t be worse, with overall market conditions driving investors away from volatile assets, the crypto market in a nosedive and the Terra/Luna stable coin entering a death spiral.

To answer the questions, “Has the NFT bubble popped?” and “What projects, if any, might survive?” we need to delve into potential demand in secondary markets and look at NFT projects that have had a profitable mint so far in 2022.

Proven demand vs. niche NFTs
Since the digital artist known as Beeple sold his NFT for $69 million in October 2021, and with individual items in collections of NFTs, like those of the Bored Ape Yacht Club, also going for millions, the artworks have been the talk of the internet. However, with many projects endowed with large marketing budgets looking to capitalize on investor FOMO — fear of missing out — the market has been flooded with low-quality works.

Nevertheless, some NFTs have attracted investors who believe that, despite their eye-watering prices, they can be resold at a higher price. Sina Estavi, CEO of Bridge Oracle, acted on such a belief in March 2021 when he bought an NFT of Jack Dorsey’s first tweet for $2.9 million; nnow may be forced to sell for considerably less.

Meanwhile, some larger companies and franchises like Marvel and NBA Superstar have targeted collectors with popular fictional characters and franchises. Such brands behind NFT projects can be essential in determining the longevity of a project. By tapping into an existing market of collectors, these projects can rely on potential secondary buyers in the future based on proven demand for their NFTs.

Demand on the secondary market is linked to criteria including whether the project has sold before, how long it took to sell and, if auctioned off after the initial mint, how many bidders it attracted. These factors are key to determining potential demand for an NFT in the future. 

But Morgan Stanley analysts led by Sheena Shah wrote in a March report that “hyped and leveraged areas of crypto, such as decentralized finance (DeFi) and crypto-backed stablecoins, are seeing mass liquidations, as it is becoming clearer that all the elevated prices were traded on speculation, with limited real user demand.” She speculated that stablecoins are the first wave and that other segments such as NFTs are next.

Blue-chip NFTs
Despite the market downturn, popular NFT projects have continued to find success. So-called blue chip NFTs purport to have hit a point in development where they are relatively safe investments compared to the rest of the NFT market. These include projects such as CryptoPunks, Bored Ape Yacht Club, VeVe and Gala Games.

The Bored Ape Yacht Club’s metaverse land sale, for example, which represents a deed to virtual plot of land under the project name Otherdeeds, succeeded in raising over $300 million within a few days of its April initial minting. Also in April, another popular project, Moonbirds, brought in over $66 million in its mint sale of a new collection. These are just two examples of projects with strong backing and dedicated teams that are findingsuccess, even in a hostile market. 

Not every project can enjoy this kind of success. Block-chain analytics firm Nansen found that one out of every three NFT projects has essentially expired with little to no activity on the blockchain. Another third of NFT projects are trading below the cost to mint the NFT. Overall, there is less money flowing into new NFT projects and older projects are finding it hard to maintain values and are failing to generate crucial interest.

Crypto bear
For those still wanting to invest in NFTs, it is important to look out for a few key factors that increase the chances of a project’s success and the safety of investing in it. The first factor to look for is a project with proven appeal and demonstrated demand on the secondary market. Sani Estavi’s NFT of Jack Dorsey’s first tweet is an extremely niche product that demands a niche buyer, and that can take time. Blue-chip NFT Bored Ape Yacht Club has proven demand and such an NFT reasonably priced can be sold within hours. 

The second key factor is to avoid projects that bring little innovation or professionalism to the table. Cryptocurrency is a space rife with sketchy projects with little chance of success. These projects often use large amounts of crypto lingo to try to instill a sense of FOMO in the prospective buyer. 

This brings us to the final key factor: a dedicated team that will stick with a project for the long term to weather this upcoming bear market. A team that has publicly announced their real identities is much more likely to do everything they can to ensure their project’s success. Conversely, NFTs with fully anonymous teams can disappear quickly. 

If we judge crypto on the same basis as equities, then the current crypto market is in a bear market. Historically, bear markets mean companies will face lower valuations and have a harder time raising funds and convincing consumers to buy their products. This crypto bear market will likely mean the same things will happen to cryptocurrencies and NFTs. 

Although they are still a developing asset class, NFTs will face the same challenges as other investments. The blue-chip NFT projects will most likely survive but also see a decrease in demand and runaway valuations, while projects that do not have sound fundamentals and a dedicated team will likely disappear.