Despite gaining nearly 70% in the month of July, ethereum — the world's second-largest cryptocurrency — experienced a price drop of roughly 66% in Q2, according to a new report from Nonfungible.com. Unsurprisingly, the washout was reflected in a drop of almost 75% in value for NFTs, which could spell trouble for Disruptor 50 companies like Dapper Labs and MoonPay.
NFTs have come for just about every corner of the Internet and every business willing to throw money at what's been dubbed "Web3" — a hypothetical, future version of the net based on blockchain technology. The unique digital assets, often collectibles like artwork and sports trading cards, are most commonly built on the blockchain network behind ethereum.
"This phenomenon can be explained by the speculation observed in collectibles and by the need of a large number of traders to find liquidity in a more than unstable market," the report says.
Overall, cryptocurrencies have been sensitive to macroeconomic conditions, such as rate hikes and inflation data. However, the latest optimism around ethereum is specific to the blockchain network it runs on, which is due to receive a major software upgrade in September that's known as the "merge" and is expected to result in a faster, more energy-efficient infrastructure for creating cryptocurrencies. Currently, the cryptocurrency mining process is underpinned by something known as "proof of work." And it uses up an incredibly large amount of energy.
Sales volume, although declining, remains relatively high, peaking at over 600,000 sales in the primary market in early June. According to the report, the weekly volume of sales on the primary market has very rarely been below 200,000 sales per week, which suggests that projects are still issuing assets regularly but for way lower prices.
"Our interpretation is that the liquidity of most [NFT] collections has decreased considerably, thus lowering the rate of resale on the secondary market," the report says. "The primary market has remained relatively stable in comparison, which brings this balance between the two markets."
In early May there was also an inversion of the curves between the volume of profit and loss on the resale of NFTs. "If the trend settles over the next few weeks and months, it's a safe bet that NFT trading will no longer be a profitable activity at all in the 3rd quarter of 2022," the report concluded.
"We've seen trading volume and prices decline sometimes by 80 to 90 percent," OneOf co-founder and CEO Lin Dai, recently told CNBC, adding that we're currently seeing a correction as some of the more prominent collections prop up the overall market, so that new collections can enter the space at a lower price point, or in some cases free, "in hoping that collectors will find interest over the long haul."
The new report suggests it's true that collectibles have been most affected by the losses on resale. "Collectibles are historically the most speculative assets in the industry, so it is not surprising to see very high rates of resales at a loss in a bear market environment," the report says.
Investors have been quick to assert that long-term value in digital assets will come from their utility. It's a message that's been difficult for institutional investors to digest as collectibles, such as Yuga Labs' prominent Bored Ape Yacht Club and OtherSide, continue to experience dramatic price volatility. Combined, the two collections represented more than $2 billion in trading last quarter. The equally-hyped CryptoPunks, which Yuga Labs acquired the intellectual property to in March, pales in comparison with just $161 million traded over the period.
Yuga Labs represents just over 30% of the entire NFT market during the 2nd quarter of 2022. "We are witnessing a hyper-centralization of activity in these bear market times where blue chip [collections] retain most of their value, and where trading is focused on this asset class," the report says.
The current floor price of a Bored Ape, of which there are 10,000 total in circulation, stands at roughly $140,000, down from a high of about $434,000 in April. With every secondary sale of a Bored Ape NFT, Yuga Labs gets a 2.5 percent royalty. Last October, one of the collectibles was auctioned at Sotheby's for an eye-watering $3.4 million.
Across the board, the number of buyers is still higher than the number of sellers. The number of weekly sellers seems to be stabilizing at around 100,000 for 132,000 buyers, according to the report.
As money continues to flow into Web3, the jury is still out as to whether or not NFTs are here to stay... but, according to the latest data, there's certainly a chance that trading won't be profitable anytime soon. Still, for most token holders (who remain in the space as collectors), does that really matter?