Non-fungible tokens are a booming market that carried several cryptocurrencies on its shoulders. Solana summer 2021 was happening not only because of dApps but also releasing iconic NFT collections like the Degenerate Ape Academy. Other collections like the Bored Ape Yacht Club became international brands with prominent figures like Eminem and Snoop Dogg actively promoting the NFTs through their art. At least in crypto, the recession seems to be very real, and not only Bitcoin and Ethereum are plummeting. The NFT economy is tanking and while critics claim that it is over, fans and collectors start buying boutique NFTs.

Why is the market crashing and is this the beginning of the end or rather a dip buying opportunity?

Borrowers get liquidated

One reason for tanking prices is the general market conditions. However, there are a couple of things to consider when looking at NFTs. Unlike cryptocurrencies, they have a so-called floor price measuring only the cheapest NFT available or the last sale at the lowest price. Needless to say, the floor price is defined by those items of a collection that have common traits and are not considered to be rare. Rare pieces are still stable in price.

Another factor that is driving the price down is liquidations. Usually, an NFT sits warm and cozy in each holder’s wallet but some people thought it is a good idea to borrow money against their NFTs. Using an NFT as collateral carries risks that are hard to manage. At least a part of the market is opaque and price manipulation is easy. Meaning that if anybody is dumping his own NFTs by buying them from himself at a price below the floor price a liquidation event can be triggered.

It is still up for debate how much wash trading is going on in the NFT market but it is needless to say that the possibility of forcing other people out of their investment is an incentive to reckless traders.

NFTs are more than digital gold

Aside from the fact that the decentralized market has still its flaws, NFTs offer something that is a driving price factor. They are rare. Most collections issue between 5.000 and 10.000 NFTs. Meaning it is hard to get one if not impossible once a collection is sold out and collectors leave their art pieces sitting in their wallets.

While the market took a hit recently, some analysts believe that this is indeed a buying opportunity. Stars like Eminem or Snoop Dogg won’t leave their NFTs or dump them. On the contrary, the most renowned collections are likely to see more deals with artists and brands. Their long-term value could grow even more in the future.

There is also no possibility to increase the supply of each mint. Of course, there could be a derivative of the same collection or a new mint but both won’t hurt holders of the first edition. NFTs are collectibles after all and that makes them very unique.

Liquidity is a problem

Where ever there is light, there is also a shadow. Floor prices for the most iconic collections might seem more attractive at these levels but there is a risk that other investments like Bitcoin don’t share. NFTs are still highly illiquid. There is no order book that you could execute a trade against.

Everything that an investor can do is simply lower the price until a buyer is found or accept offers for his art piece. That is of course if he is seeking an option to bail and leave his position for cash or another investment in a very short time. This creates a unique situation where wealthy buyers have generally more options since they simply can afford to hold an NFT for a longer period of time. So, the question for any investor interested in NFTs is whether he can hold out until the market is becoming more liquid and buyers are willing to offer high bids for each NFT.

Similarities with altcoins

NFTs are still very young and we can observe similarities to the early days of altcoins. Many projects tried to become an alternative to Bitcoin back in the day. Most of them failed and only a very small selection of coins mastered the test of time with Litecoin and Dogecoin being two examples.

That being said, art is highly subjective and there might be collections that will succeed that cannot present any use case besides being valued as an art piece. But which features does an NFT need to have in order to be considered a possible AAA+ investment?

• Strong community: That is something that can carry a project very far. You can easily determine that by looking at Bitcoin or Dogecoin.
• Prominent investors: Having Snoop or Steve Aoki on board is an added bonus.
• Strong developers and marketing: The team behind an NFT collection is very important. Companies like Yuga Labs are negotiating deals with global players like Adidas.
• Artists: It makes a difference if an NFT is designed by Beeple or Frank your friendly neighbor. On the other hand, if Frank passes away one day and his art gets discovered and is considered haute couture it won’t hurt to ask him for an autograph while he is still alive.
• Tokenomics: Many NFT projects are adding tokenomics to their collections. This can get tricky since some projects simply offer tokens for keeping NFTs locked and staked. Use cases are very important in this segment.

*The picture used in this article is for illustration only. LiteBit does not own any of these NFTs. All intellectual property rights belong to the respective holders.