22 Feb 22 – How A NFT Bear Market Might Play Out
How a bearish crypto market can trigger the downfall of NFTs
In my last article, I theorized that NFTs might lead crypto into a super-cycle.
Assuming that NFTs become mainstream with everyday applications integrating NFTs, and assuming that cryptocurrencies remain the main transacting medium for NFTs, this widespread adoption of NFTs gives crypto a strong use case, and can possibly propel crypto into another bull run.
But you see, it's easy to run on assumptions and hope. What about the converse? We all know that NFTs are currently running on hype, so what if the hype, interest, and demand dies down? How will a bear market look like?
Concerns Of A Crypto Bear Market
For many of us who have been through the 2018 – 2020 bear market, it was almost as if we were undergoing learned helplessness. With most altcoins down over 95%, trading the swings of 20% to 30% were about as exciting as it got. It's no wonder why many of us remain apprehensive throughout the bull market.
Since BTC saw new highs in 2021, the $30k price level has been an incredibly strong support zone. And while we remain hopeful for as long as BTC holds above the $30+k levels, it's not unimaginable to see a drawdown that breaks below $30k given the volatility of the crypto asset. Note: I'm using BTC as a proxy for overall crypto market health but you can apply the same support/resistance logic to any major crypto asset.
And I think that's where majority of the market is at – cautiously optimistic.
It's hard to ignore the fact that we're seeing lower-high-lower-low formations, which is indicative of a bearish trend. The fact that BTC is not breaking these lower highs to invalidate the formation lends support on the possibility of a prolonged bear market – sideways movement would actually be pretty good for crypto's long-term prospect.
Should there be any political instability, any major pullback as we see in traditional equities, it's probable that BTC and crypto take a significant correction along with it. The question then becomes:
How would a bearish crypto market affect the NFT market?
Bearish Crypto = Bearish NFTs?
Before spelling out all the doom and gloom, let me start on a more positive note.
The nascency of the NFT market means that many new entrants still perceive NFTs in dollar value. This means that if ETH price drops, the same NFT that cost 1ETH becomes cheaper in dollar value, and hence more people are willing to buy it. As such, in the past few episodes where ETH has seen a correction, we also saw an increase in floor price of major NFTs in ETH value.
However, this has only been true for a bullish/sideways crypto market.
Should crypto not capitulate, the current dip in BTC and ETH prices might extend the NFT bull market. Not to mention, many of us are expecting the impending launch of Coinbase NFT to bring in a new wave of buyers. New buyers, new demand, higher floor prices. WAGMI.
But what if crypto continues on a downward spiral? What if BTC breaks below $30k and ETH breaks below $2k, and cryptocurrencies are taking months to find a new support zone. What do you think will happen to NFTs?
How Different Types Of NFTs May Respond Differently To A Bearish Crypto
It's important to consider that not all NFTs are equal. Some are there to build for the long-term and are prepared to build across a 3 to 4 year bear market, while most are there for the hype. Yet, I believe all will be negatively affected to a certain extent.
Legit "Blue-Chip" Projects
For projects with strong demand, almost "blue-chip" like in terms of their community and team, we might see only a small correction. Yes, there is strong holding demand, which means that most holders will unlikely sell their NFTs for cheap unless they need the money. But there will always be some sellers who need liquidity – be it to cope with their trades, for financial security, or perhaps just to get by inflation.
The question then becomes, will there be enough demand to soak up these sellers?
In a sideways or bullish crypto market, most holders are comfortable to hold crypto or NFT. But if ETH appears to be trending down, would they have the same confidence to buy NFTs with it? Also, will they have the same confidence to hold ETH knowing that it's probable to continue downwards in dollar value?
Chances are, even if a "blue-chip" NFT is trading at a 30% to 50% discount, where a believer would typically not think twice about buying it, the declining crypto market may cause them to just sit out for the time being. The reason could be not wanting to be stuck in illiquid NFTs for too long, or they might want to seek out even better buying opportunities – either way, the decline in buying demand combined with increased selling demand can cause floor prices to drop fast.
Short-Term Passion Projects
When it comes to projects who have not planned to built for the long term, I expect the capitulation to be even worse. Simply put, we just need to compare the buying and selling demand for these projects versus the legit projects.
In terms of selling demand, these projects will consist of people who are there to flip, there for the money, there not to HODL or build but there for the the hype. This means that at the slightest of warning bells, these projects will likely have throngs of people heading for the exits – and the desperation to exit is what will cause the floor price to melt.
In terms of buying demand, savvy buyers will know that this presents a good opportunity to look for potential discounts. However, with discount across the board on all projects, one will have to prioritize his buys – do you think that a buyer will prefer to buy a legit project who's building long-term or a passion project with good art?
Buying demand for these NFTs will be far worse than legit projects, unless they dip so much it becomes cheap enough – so cheap that it becomes something that a buyer can spend and not see for many years when NFTs will make a resurgence again.
It is also with this line of thought that I agree with Gary Vee that 95% of projects will be worth nothing. The big bear market wipeout, which frankly might just be a replay of the ICO boom of 2018.
Assess Your Own NFT Portfolio
The bull market has minted so many millionaires – and no, I don't just mean the NFT market.
If you think your NFT portfolio can tank a 50% decline, I urge you to think again. What exactly is in your portfolio? Which projects are building something for the long run, and which ones resemble more of a passion project?
Don't get me wrong, I spend a decent amount of ETH supporting artists' passion projects. I think that NFTs are incredible in bringing attention to their work and giving artists their rightful reward. At the same time, I expect these NFTs to be the most illiquid, the ones that I might never find a buyer with a similar taste and whom is willing to pay a similar or higher price than I did.
There are also projects that are building fun and novel use cases with NFTs – communities of like-minded enthusiasts passionate about a certain cause, games that integrate NFT capabilities, fun projects that mix staking and DeFi elements etc. And I'm in no way the best person to critique whether a project is building for the long-term or not.
However, I do look for signs of the team's composition, vision, and experience, which signal to me whether they are here to ride on the NFT wave or are well-equipped to build through a bear market. In my opinion, a project that has little or no hype but is prepared to build through a bear market will eventually see its success – that was the story of Axie Infinity.
Having said that, being able to build for the long-term would not protect them from a market-wide onslaught. As an investor, I'll be looking for opportunities to double down on some of these projects, should I have the spare liquidity.
ETH to NFT Ratio
Just like how we need to have dollar liquidity to dollar-cost average on our investments, the same can be said of ETH and NFTs. We need to maintain a certain amount of ETH to buy on NFT "dips".
There are counter arguments to that though. Some people believe that with ETH's value potentially declining, they would rather be holding blue-chip assets than ETH. Others think that if you keep holding ETH, you're never truly invested in the future of NFTs, that if you see the potential of NFTs, you would go all-in.
To each his own. And I find that the answer might lie in a balance, and you should adjust the ratio for your own risk tolerance and to match your own beliefs. Personally, I'm inclined to go with a 80–20 split, with 80% invested in NFTs. I know that holding 20% might not be enough for me to buy blue-chips on discount, and a 50-50 split might be better, but I can't stand seeing 50% of my ETH do nothing knowing what I know about NFTs.
If you're more risk averse, definitely lean on the side with a bigger ETH percentage. After all, ETH is way more liquid than NFTs. You can get a spot rate on your ETH but you'll not always get a buyer for your NFT even if you undercut the floor.
Surviving The Tsunami
I imagine the onslaught of the bear market to be like an impending tsunami.
Getting into NFTs is akin to sailing out to sea. The size of your portfolio is like the boat or yacht that you've chosen to take the ride out. Everything is nice and normal, until it isn't.
If you're early, it matters not whether you're on a small kayak, a speed boat, or a yacht, you'll be out in the clear water. When the tsunami warning bells are sounding, you'll just need to sail beyond the onset of the waves.
The ones who will suffer are those who are late, who are stuck between the shore and the first wave. The faster your boat, the better your chance of riding it out. And if you're slow, you'd better hope for a sturdier boat that can outlast the crash.
If you're on the shores and you see the receding shoreline, stay the fk away and get as far away as possible. If you're in the shallow and have dabbled into some NFTs, GTFO if you even want to have anything left. If you're trying to double down and to swim as fast you can, good luck. There's always a chance of survival but little hopes of getting away unscathed.
This is just a word of caution, and I certainly hope I'm over-imagining things. None of us wish to see a crash. Yet, even though we hope for a smooth ride, we should always be prepared for a rough one.
No one said NFTs (or crypto) is going to be risk-free or easy, so don't let the bullish months get into your head. Because it's when we get complacent, will we then hurt the most.