The NFT market is flashing emerald green all over again, and the headlines are all yelling RALLY! At $6 billion market cap and 191% daily sales growth no less, that’s hard news to ignore! Even the most jaded crypto enthusiasts have to sit up and pay attention. Before you dive headfirst back into this NFT craze, hold your horses. Are we experiencing a true renaissance, or merely another temporary spell in the limelight?
Now, here’s the thing, I’m not saying that NFTs are going to zero. What I’m suggesting is that we need to look beyond the hype. Remember the Beanie Baby craze? Tulip mania? Human psychology hasn't changed. Well, let’s separate the fakes from the real here and look at three immutable facts behind this alleged NFT rally.
Blue-Chip Dominance A Double-Edged Sword
Yes, the boom is still being driven by blue-chip NFTs like CryptoPunks. The CryptoPunks acquisition of 45 NFTs for $7.8 million is significant, surely. That kind of vote of confidence is certainly noteworthy, and it’s making headlines with its size and scope. The floor price of CryptoPunks increased by 16.5% in one day! Whoa!
Here's the problem: this rally is dangerously top-heavy. He continues as we find it, but only because it’s concentrated in a few large, legacy collections. Imagine it as the S&P 500, but instead of 500 companies, it’s only, well, 5. What does it mean if one of those “companies” tanks?
The growing concentration of wealth among these blue-chip NFTs additionally encourages manipulation and price correction through wash trading. Just a few whales would have the ability to manipulate a huge chunk of the supply. They can reimpose consumer price inflation and manufacture the false appearance of consumer demand. This attitude doesn’t create a healthy, diverse, competitive market; this is creation of a play ground for the super wealthy.
This isn't the democratization of art. It's the financialization of it. And that's a very different thing. Remember the 2008 financial crisis? In many ways, it was built on financial innovations that nobody fully comprehended. In other words, are we creating an even larger house of cards with NFTs? I am not suggesting that we are, but we need to be asking the question. Is this an indicator of a robust market, one flush with options? Or, does it mean that the market is vulnerable to predatory behavior?
Correlation Isn't Necessarily Causation?
The NFT rally comes alongside the rise of Ethereum (ETH) and Solana (SOL). ETH is breaking all-time highs, and SOL is on fire. Makes sense, right? Adds up to higher crypto prices, more disposable income, just more money in general flowing into NFTs.
Just because two things occur simultaneously doesn’t mean one is responsible for the other. Correlation doesn't equal causation. This is Statistics 101. I’m deeply concerned though that the NFT market is just going along for the ride on the broader crypto bull run. If ETH and SOL go into a correction, what does the future hold for the NFT market?
Think of it like this: ice cream sales increase in the summer. So does the number of drownings. Does that mean ice cream causes drowning? Of course not. Both are correlated with warm weather.
This rally in NFTs is almost certainly tied to appreciation of ETH and SOL. Just because these two things are happening doesn’t mean one is causing the other. What if all the surface-level demand for NFTs isn’t actually there? What if instead, it’s some sort of passing fad, driven by speculation and hot cash?
Because let me tell you—the FOMO is a hell of a drug. And as of right now, many are drinking the Kool-aid. But when that high wears off, what then?
Kronos Research sees the “whale buying” as a bullish sign of blue-chip NFTs’ longstanding immunity. They further point to a growing appetite from institutional investors. They expect an eventual reallocation of capital back into premium NFTs because the market will have greater liquidity.
Institutional Interest: Still Just a Toe Dip?
I agree that the institutional interest might be what changes the NFT game. While positive signs are plentiful, I think it’s too early to say that institutions are all the way in yet. I think they are testing the waters. They’re getting their feet wet on what the reality is.
There are several reasons to be cautious. One, the regulatory environment surrounding NFTs remains unclear. Institutions are risk-averse. They don’t want to invest in assets that may be challenged in court or face a regulatory clampdown. Second, the NFT market remains far more nascent and illiquid. To keep the market functioning, institutions must have predictably easy access to buying and selling large amounts of assets without causing market drag. That's difficult to do with NFTs.
Perhaps most importantly, institutions must recognize palpable, long-term value in NFTs. As such, they aren’t going to commit to that investment simply because the value of their land is increasing. For consumer subscription businesses, they need to see a clear path to profitability. What is the utility? Is it art? Is it membership? What is the value?
So, while I'm not ruling out institutional investment in NFTs, I think it's important to temper expectations. It's a long game, not a sprint.
The NFT market is definitely enjoying a resurgence, but let’s not jump to the moon just yet. Recalling the dot-com boom only five years ago. Consider the housing bubble and all the other manias that have once monopolized our imagination—like dotcoms and subprime cars and crypto. Human beings are prone to irrational exuberance.
Whether this rally will indeed turn out to be the beginning of a bull market, or just another bear market false dawn remains to be seen. Those three truths are truths that should give everyone pause.
I'm not saying NFTs are worthless. What I’m arguing is that we need to approach them, again, with a healthy dose of skepticism. Do your own research. Understand the risks. And never invest money you can’t afford to lose.
The NFT market is showing signs of life, but let's not get carried away. Let's remember the dot-com boom, the housing bubble, and all the other manias that have come and gone throughout history. Human beings are prone to irrational exuberance.
This rally could be the start of something big, or it could be another false dawn. The three truths above are reasons to be cautious.
I'm not saying NFTs are worthless. I'm saying we need to approach them with a healthy dose of skepticism. Do your own research. Understand the risks. And don't invest more than you can afford to lose.
