Why NFTs Aren’t Coming Back

Few asset classes have collapsed more in value this year than NFTs. Cryptocurrencies, which NFTs are based on, are down a lot. But NFTs are down even more. There are some NFTs that sold for millions last year that aren’t even catching a bid this year. For example, Jack Dorsey’s famous “first Tweet” NFT once sold for $48 million but fetched just $280 this year. Other similar stories abound.

Basically, the NFT space is in shambles this year. And most likely, it won’t come back. NFTs were a product of a very specific moment in history. In 2021, the world was flush with excess liquidity, and people were hungry for things to spend money on. As if eager to get rid of unwanted cash, they spent money on items whose value proposition was questionable at best. In today’s much tougher environment, NFTs are unlikely to make a comeback.

No more “free” money

One of the reasons why NFTs aren’t coming back is because we no longer have “free” money. I put free in scare quotes, because money was never truly free for consumers. But last year, the Fed’s policy rate was close to 0%. That translated to very low interest rates on things like

• Brokers’ margin loans;
• Lines of credit;
• Bank loans;
• And more.

Basically, money was very cheap and accessible last year. That meant that people were very willing to take risks with their money. When it doesn’t cost much to repay your debts, why not gamble a little? After all, you’re basically just losing the principle.

Today, we’re beginning to see the flaw in that logic. These days, it costs more to borrow money, and when you pay back a loan, you’re paying substantial interest. That makes risky bets like NFTs less sensible, because you don’t want to gamble when the price is so high.

A fad is a fad

A second factor that is working against NFTs is the simple fact that they were a fad. The definition of a fad is “an intense but short-lived mass enthusiasm.” Common features of fads include

• A rapid rise;
• A short duration; and
• A lack of features that make the object of the “fad” valuable over the long run.

Does that sound a little bit like NFTs to you? Fundamentally, it was never clear that NFTs even conferred ownership of the digital assets they pointed do. The value proposition was pretty questionable. Given this, it was pretty obvious that the interest in NFTs was a fad, even from the beginning. The phenomenon had all the telltale signs.

What about Ether?

One interesting aspect of the decline of NFTs is how it affects Ethereum (CRYPTO:ETH). Ether is the cryptocurrency that was used to buy and sell NFTs last year. This year, it has been crashing, like most cryptocurrencies. However, it is crashing much more than other cryptos: ETH is down 70% this year, while Bitcoin is down just 56%. Possibly, some people were buying and selling Ether last year just to buy NFTs. If they did, then their departure accounts for some of the loss of demand for ETH. If they aren’t shaken out of the market yet, then ETH could still have much further to fall.