NFT markets are almost entirely new phenomena, having only gained significant popularity in December 2017 with the launch of CryptoKitties. This, paired with the fact that NFTs are mostly in highly subjective categories, like art and collectibles, means that NFT markets and projects rely heavily on community approval for their assets to accrue value. This means that NFT markets tend to be highly cyclical, and trade volumes tend to flow to “hot” projects.
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NFTs that are less subjective and have some levels of functionality, like virtual land and game assets, can be slightly more quantitative compared to art and collectibles. For example, users can determine a comparative value for a sword that does 10 attack damage and a sword that does 100. Virtual land can be somewhat quantified by what type of structure and experience it provides users. This ability to quantify fair market value for an asset allows these two NFT categories to be less susceptible to the cyclical nature of NFT markets, but they are still by no means immune.
To give an example, in May 2020, the average monthly trade volume for Decentraland was ~$76,000. But in April 2020, the month prior, it was just $18,500. I am sure that there was some sort of event or occurrence that brought more attention to Decentraland for the “hot” month of May, but that is my point. A project gets attention for X and Y reasons, and the trade volumes for that project will increase massively as it becomes the “hot” thing.
Perhaps no project represents the hot and cold nature of NFTs better than CryptoPunks. In May 2020, their monthly trade volume was $70,250, but in June 2020, the monthly trade volume dropped to $12,000. A few months later, in September 2020, the monthly trade volume exploded to $120,500, which is roughly a ~900% increase from June 2020. Note that this price increase cannot be attributed solely to the rise in ETH during that period: ETH went from ~$200 in June 2020 to ~$400 in September, which is only an increase of 100%. (Data from nonfungibles.com)
It is quite difficult to accurately measure social metrics (growth in the number of followers, Discord members, social chatter, etc.) for various NFT projects, but I would say from experience that social chatter is highly correlated with trade volumes and value accrual. In the future, I expect that we will find real evidence of this via platforms and websites that track NFT projects’ social metrics, but as of today, these types of platforms do not exist. The reason social metrics will correlate with increased trade volumes and value accrual is that, again, the majority of these assets are highly subjective and difficult to value. People will follow and receieve signals from other market participants.
If I noticed everyone tweeting about a new NFT project, I would take a more serious look. It is human nature to seek validation from others, and in subjective markets, social validation is all that you need.
It is to understand why NFT projects are so cyclical. One month everyone is discussing how virtual worlds will lead to the formation of the metaverse, and the next month everyone is talking about how crypto art is the future of art (both statements are true btw 😎). In these highly subjective markets, community approval is key for a project’s success. As these markets evolve and participants get better access to data, I expect us (myself included) to become less lemming-like. But for the foreseeable future, I see the markets remaining highly cyclical, based on what those in the NFT community are chatting about on social media.