Why 99% Of NFTs Will Go To Zero

The insane valuations of NFTs have been making the headlines. Whether it's Beeple's $69M sale, over $1B in CryptoPunks sale, or Bored Ape's multi-million dollar auction at Sotheby's, it's clear that we are in a mania – what many would call a bubble.

If you think it's only what the media presents, boy should you get your hands dirty and try to mint one of the popular sales. Speculators are willing to pay more for the gas than the cost of the NFTs itself. The Sevens that costs 0.07ETH but people paid an average of 0.9ETH to mint it? Or the dutch auction of 10,000 Mutant Apes that sold out in 10 minutes, with people paying thousands worth in gas fee per mint?

So we all know we're in a bubble. The question to ask is, are these valuations justified? Is there a value that these investors are seeing that others don't? While I believe there is value in some NFTs, most of them will crash and burn because of these reasons.

1. Supply Will Far Exceed Demand

We are in the super early stage of the adoption cycle, and the market is still figuring out what NFTs are, and what is their value. This means that we will get a whole lot of projects that makes lofty promises, and even some that does nothing at all.

And it's also in this genesis period, where everyone is trying to speculate on the winners, blindly throwing out their bets onto the roulette table. The sensational sale of "blue-chip" NFTs and onboarding on social influencers is drawing new demand into the market, as everyone tries to bet on the next unicorn.

While supply will continue to grow for as long as this hype and bubble is "flourishing", it shouldn't come as a surprise when demand eventually tapers off, and people realise that most of these projects aren't delivering. We already saw an instance of this in May, when demand cratered after Bitcoin and friends suffered a major correction. Should crypto suffer another crash, don't expect NFT demand to sustain.

2. Most Projects Aren't Made To Withstand A Crypto Winter

During the crypto winter of 2018, many ICO projects raised funds in ETH to build. Yet, many died and faded into oblivion as prices of ETH held below $200 for over a year. Today, many NFT projects today are passion projects, which leads us to wonder, will the founders or community be around when prices are not moving?

One might argue that unlike ICOs where token holders can't do anything, NFT projects have more practical use cases. For example, Bored Apes or VeeFriends get you access to a community. The likes of gaming NFTs like Axie Infinity fosters a gaming community. Many other NFT projects have utility that community members can participate in, and this might get us through a winter, if any.

While that argument may be valid, keep in mind that the founding team and developers will need something to sustain their work. If they are already building these projects since 2017/2018, they'll most likely be fine. But for many NFT passion projects, they won't get away with giving out their NFTs to influencers for marketing, or giving it away to offset the growth of the community – not when NFT demand craters in a winter.

3. There Is Way Too Much Speculators In NFTs

If we were to consider NFT as an upcoming industry or a company with huge potential, let us consider the stakeholders in a project: the builders, the early adopters community, and the speculative community. At present, we have too many speculators, although you can argue how much is too much.

Speculators expect to make a gain, and play with money they can afford to lose. They hope to get out and make a killing before the music stops, otherwise, they'd write it off as a loss. When there are a lot of such people in the ecosystem, it is only a matter of time before prices correct.

Assuming there is a true value and a speculative value for every asset, the speculative value of an NFT far outweighs its true value currently. In the long run, the market will go on to find a correct value. There is a chance for the "correct value" to be higher than present, and the market will go on to realise that value just as Facebook and Amazon did. Yet, there is a higher chance that the "correct value" is zero given the infancy of the industry.

We Are All Too Familiar With Bubble-Like Assets

Speculative bubbles never end well. That was the case of the subprime mortgage bubble, and that was the case of the 2018 crypto bubble.

If there's any consolation, we could look at the dot-com bubble. There were big names like Amazon, eBay, and Booking.com that build tangible use cases and went back up in the long run. Even then, these blue-chips still took a massive hit, which is poignant reminder that we really don't have to rush in to speculate, and that there is some truth to HODLing.

NFTs fundamentally changes the way we view ownership, and it can impact both the virtual and physical world. If this is an advancement that is waiting to be assimilated into our lives, it will only be a matter of time before the market realises its true value.

But until then, there will be hype built around it that invite speculators. There will be suckers who dump money hoping to make a fortune, only to give up and lose interest in it. Prices will fluctuate like the ebbs and flows of markets, so start with a learning mindset, and you will never feel like you have lost even if the bubble bursts.