In the last year, the market for NFT items has shown explosive growth, exceeding the volume of $20 billion. It has attracted the attention of the business press to this topic and has caused a boom among investors seeking to make money from NFT. As a result, market valuations of unique collectible and gaming NFT items reach hundreds of thousands and even millions of dollars. And such cases are not rare. You can read more about this in one of our previous articles.
On the other hand, some skeptics say that the NFT market is another economic bubble that will burst before our eyes as fast as it grew in 2021. Such opinions cause justifiable apprehension among some investors. If you are afraid to invest in the NFT, the lucky 7 game online may interest you.
In today’s article, let’s find out if NFT is just a bubble blown by speculative demand or if there is real value in this industry that allows earning from NFT in the long run.
What is an economic bubble?
So, first, let’s understand what an economic bubble is and the criteria for defining it.
An economic bubble is a market situation where the price of certain assets greatly exceeds their real value due to speculative demand.
Rapid growth is followed by a sharp fall in the prices of such assets. In such a situation, it is customary to say that the bubble burst.
By what criteria can we tell if we are facing an economic bubble? Let us elaborate on each measure:
- The rapid rise in asset prices. The market grows several times, and sometimes ten times over, in a short period;
- The dominance of speculative demand for assets. The growth of asset prices in an economic bubble is primarily due to the desire of speculators to make money by reselling the fast-growing support;
- The difficulty in determining the fundamental (fair) value of assets. In other words, it is difficult for market participants to understand whether the high price of an asset is based on its actual value or is growing only due to speculative demand;
- The range of asset prices far exceeds their fair value. In many cases, even an untrained person can see that the market is overheated and the cost of an asset does not match its real characteristics.
The problem is that an economic bubble is not always easy to recognize and can sometimes be confused with an actively developing breakout market.
Also, many investors knowingly risk investing in the market, knowing it is a bubble. It is done with the expectation of getting a high return and out of the bubble before it bursts. It is a hazardous strategy, which for most unprepared investors, ends up in losses.
Is the NFT market an economic bubble?
Now that we remember what an economic bubble is let’s look at the NFT market through this lens.
The bulk of the NFT market now consists of two different main areas. Therefore, we will analyze them separately today.
The main volume of the NFT market now consists of two main directions, which are pretty different from each other. Therefore we will analyze them separately today.
The first direction is collectible NFT items. These include various objects of digital art, such as paintings and collectibles – for example, recordings of the best moments of NBA games.
The second central area of the NFT market is NFT games. These projects use blockchain as the basis of their game mechanics and mainly belong to the Play-to-Earn category. These games have in common that their worlds are filled with in-game NFT items that players can fully dispose of and trade even outside of the game itself. Furthermore, the game economy is based on in-game currency, a full-fledged cryptocurrency traded on exchanges. Accordingly, players can not only play NFT games but also make money from them.
Now let’s look at both areas of the NFT market in parallel for signs of an economic bubble:
A surge in asset prices.
Both directions have shown a sharp rise in prices. This reaction is a consequence of the low-base effect and the novelty of the market to a wide range of participants.
The speculative nature of asset demand.
By this criterion, there are significant differences between collectible and gaming NFT.
Collectible NFT: According to experts in art and collecting, 90% of collectible NFTs have no artistic or collector value. Accordingly, the growth in demand for these assets is mainly speculative.
Gaming NFTs: On the other hand, gaming NFTs are a fundamental tool for participating in games with an audience of tens of millions of people. Many in-game NFT items also offer the opportunity to earn passive income by renting, selling, and farming them. Accordingly, in-game NFTs carry real value for players and investors. Therefore, the nature of demand for gaming NFTs cannot be called speculative (although some speculative market is not excluded either).
The difficulty of calculating the fundamental value
Collectible NFTs: For collectible NFTs, it is challenging to figure entire value because they do not create cash flow and valuations of comparable items are subjective.
Gaming NFT: Gaming NFT has all the parameters to calculate the fundamental value: cash flow, number of players, infrastructure development plans, and financial parameters of comparable assets.
The superiority of market price over fundamental value
Collectible NFT: The valuation of art objects is initially based on the auction model (how much they are willing to pay) and is subjective. Accordingly, the fundamental value of collectible NFTs is virtually non-existent.
Game NFT: market price is close to and, in some cases, lower than the fundamental value (there is arbitrage because of the novelty of the market).
Conclusions
According to the results of our analysis, we can conclude that the market of collection NFT at the moment is a bubble because it meets all four criteria of this definition. Therefore, you should invest in this direction only if you have deep expertise in art and collectibles.
As for the market of gambling NFT objects, it fits only one of the four signs of an economic bubble – a sharp rise in the price of these assets. But this is logically explained by the newness of the market and the low-base effect.
The market of gaming NFT at the moment is an attractive and transparent direction for most investors. You have the opportunity to assess the prospects of your investments based on several clear criteria. Play-to-Earn games market is now in an active growth phase, so it’s the right time to look at the opportunity to make money on investments in NFT games.
