NFTs: What Happens When the Bubble Pops?

The current NFT boom has lifted hundreds of artists out of poverty and introduced thousands more to a new way of selling art without intermediaries. Artists who were selling pieces for a 100 dollars a month ago are now raking in dozens of ETH. This parabolic rise is in part thanks to influencers like Logan Paul selling their fans .jpeg cards with the implied promise of making a big profit on the resale market. Despite the legitimate utility and potential of blockchain platforms, at this moment the NFT market is a FOMO-driven speculative bubble. What’s going to happen when the bubble pops? In this article, I will forecast a few scenarios.

Disclaimer: This is just my opinion.

The most likely outcome is that some people decide it’s the top, and then it is. The people who get out before the crash are most likely the influencers who have peddled NFTs to their fans. And it’s probably happening right now, tomorrow or next week. One of the incentives to hype NFTs comes from good old legal tax evasion. Just like how in the physical world you can get a piece appraised for much more than what you paid to commission it, then donate it to charity and write the off the difference as a loss, a NFT creator can theoretically do the same if they auction off a scarce piece and donate the rest. Of course, crypto isn’t taxed like fiat currency yet, but I can’t imagine this isn’t coming soon.

Besides influencer hype, people are seeing others flip NFTs for crazy amounts, and want in. Pieces that are so ugly they wouldn’t sell for more than a dollar in the real world are going for hundreds. These pieces are highly overvalued just because they are NFTs. A huge utility of selling art as an NFT is that it comes with a certificate of authenticity that is stored on the blockchain, perfect for digital collectibles. The difference between a rare vintage Pokémon card and an influencer’s NFT is an established price. Physical collectibles appreciate overtime because they are scarce and have consistent demand. NFTs on the other hand, have no consistent demand. They blew up a month ago. The price floor is 0. On top of that, these illiquid assets can only be sold to one buyer at a time.

It’s more difficult to predict what will happen to the price of Ethereum when this all goes down. It’s plausible that many artists will liquidate their gains, after all ETH is still too turbulent to hold too much stake in.

This leads me to my next scenario, if Ethereum goes to 0 for whatever reason, at this point in time it seems most likely that would be due to another coin becoming more useful than it, every NFT that is stored on its blockchain goes down with it. Issues with ETH include a slow transition to “proof of stake,” which has led to high gas prices and unsustainable energy use as the coin becomes more popular.

Another issue is that most NFT websites take a cut and go against the ethos of crypto by not being fully decentralized. This might make sense for high end markets like Nifty Gateway but not for the average artist. It is also scarily unclear what happens if the website that an artist mints their NFT on gets hacked.

I think that the best way to get involved with NFTs is to have done it months ago. Just kidding. If you are an artist, why not try to get in soon? You may be pleasantly surprised with your earnings and the ecosystem. If you’re a collector, you will be very sorry if you’re just trying to make a quick buck, instead of buying pieces you would actually want to showcase in your future VR home, and at a price you would pay knowing no one else would want to buy it from you.

Based on everything I’ve outlined above, I hope you get a sense that NFTs have revolutionary potential, but not a solid enough infrastructure to support the current craze. For better or worse, NFTs are about to become very uncool for a couple of years, but they will come back. Some pieces that go down significantly soon will even make a huge comeback. And one day, unless all world governments ban crypto, the NFT market will become more stable and hopefully fulfill its mission of creating a freer and fairer art market.