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What Causes A Crash In The NFT Marketplace?

NFTs, or the Non-Fungible Tokens, have been the center of the ‘buy/create and get lucky’ scheme. The rise of these digital arts has attracted several billion-dollar companies to launch their version of the NFTs and benefit from unprecedented growth. 

Adding to its popularity is the advent of the ‘Metaverse,’ which further fuels this growing prevalence. So if you look at it from a broader perspective, NFTs play an imperative role in bridging the gap between the tangible and virtual worlds of the 21st century. 

But how do these digital art pieces survive in thriving markets? 

Let’s figure out as we analyze NFTs from scratch. Besides, while we’re at it, we’ll also try to figure out the probable cause behind the frequent crash of such a cash-rich industry.

NFT Behind The Scenes: How Did The Art Pieces Become So Popular?

NFTs, or non-fungible tokens, came as another innovation with the application of Blockchain technology. This is the same technology that powers other digital assets, such as cryptocurrencies, including Bitcoin (BTC), Ethereum (ETH), and more. 

It is often easy to confuse cryptocurrencies and Blockchain as interchangeable terms. But in reality, there is a stark difference between both these things. Blockchain is a technology that helps one record information in bits and stores them within the network. All of these blocks are interconnected with different cryptographic methods. 

This makes the entire list verifiable right from the start, and no one can modify the stored information. 

NFTs Boom To Fame

This idea of Blockchain technology caught the attention of someone with a taste for innovation who thought of Blockchain applications in the art world. The idea was to facilitate buying and selling of rare and unique art pieces. This is where NFT marketplaces came into existence.

Besides, if you are someone asking what is an NFT, you ought to understand the basic concept behind the entire thing. The concept dictates that a particular person will pay for a distinct copy of a specific art piece and record the same ownership on the Blockchain network.

The buyer, in this case, will have actual ownership of the artwork, and the members of the public network will then verify the same ownership. 

This is where the idea began to take off with the involvement of many renowned celebrities selling their artworks as NFTs. These artworks can include music, pictures, and even physical products or game assets. 

But people do not seem to have issues with the concept that two or more different people could independently own different copies of the same artwork. This contradicts the conventional buying and selling of physical, tangible artworks.         

But Are NFTs What They Appear To Be? 

There are no second thoughts on how NFTs have changed the world. But suppose you’re a tech enthusiast and understand how this digital art industry works. In that case, chances are that you know the ‘hype’ culture where NFTs and their market prices are directly associated with the hype around them. 

From selling a single art piece for $91.8m to a 92% crash in the market, NFTs have managed to get a negative spotlight for their highly volatile and hype culture. The recent developments in the global economy have brought up many complications for the NFT universe. 

Most stakeholders have been troubled by the concerns of an NFT crash. Many even say the crash is already here, and things will only worsen with time. 

But what causes such crashes? Or, what factors could be affecting the volatility of these art pieces? Let’s analyze them in the following section of our blog.

Probable Causes Behind An NFT Marketplace Crash

There can never be any specific cause behind a single exhaustive marketplace crash. But there are specific scenarios unique to the nature of NFT where the marketplace can end up crashing. So let’s check out these scenarios and get a better idea. 

Crash In The Cryptocurrency Market

Anybody familiar with the true NFT meaning can tell you that NFTs are also a type of cryptocurrency. So it does not come as a surprise that a crypto crash would inevitably translate to an NFT crash. The recent collapse of the crypto behemoth FTX and its implications on the industry is an excellent example of this phenomenon. 

Besides that, there are other examples, such as the Chinese ban on cryptocurrencies or Elon Musk’s hesitancy or reluctance to accept payments in cryptocurrencies. Of course, this does not change the fact that NFTs differ from cryptocurrencies, as they still hold a distinct value. However, the rise and fall in the crypto market influence the NFT markets simultaneously.            

Rising Interest Rates

When the COVID-19 pandemic struck the world, the US government set off one of the enormous bailouts in the industry’s history. With such an influx of cash dumped into the global economy, it was only a matter before inflation hit the market. As a result, the entire world and international market are now dealing with record-high inflation rates. 

Increasing federal interest rates is the only feasible way to counter this rising inflation rate. Hence the US Fed has been increasing interest rates over the past couple of months. This makes everything far more expensive than it was two years ago, further increasing the overall expenditure of an average household. 

Consequently, people are now more cautious about spending since making ends meet in such a situation is challenging. This has further reduced people’s appetite for risks and investments in risky assets such as cryptocurrencies or NFTs. This is another essential factor triggering the NFT crash that is evident today. 

Increasing NFT Scams

Scams are the worst thing that can happen to any market, and NFT is no exception. These scams often leave lasting scars on people who lose all their faith in a market post scams. In the case of NFT scams, scammers will outright steal an NFT and sell it as their own for a more nominal price than the original artwork. 

Metabulls is an excellent example of NFT scams. The creators claim they created a game solely for the Metaverse. Players could buy NFTs to play with Metabull avatar, gain sweepstakes access, and leverage other opportunities. 

The creators of such fake games generally claim to upgrade user levels once they invest in these digital art pieces. Unfortunately, none of that was real since these NFTs were not real, and the creators only wanted to scam players. This is one of the pump-and-dump type NFT scams that have been around for quite some time. 

Hence investors should be mindful of these looting tactics and do their research before investing in any NFT. These scams are another critical factor that can trigger an NFT marketplace crash. 

Bottom Line

The modern financial system we rely on has many loopholes, and people are ever ready to make the most of these loopholes. As a result, all are susceptible to crashes, whether in the conventional financial market or the NFT market. 

This makes it imperative that investors and stakeholders take necessary measures to educate themselves and make informed decisions. That said, be mindful of such factors to ensure you’re safe on your digital art journey. Invest wisely!




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