Almost as quickly as their much-hyped explosion thrust them deep into the mainstream over the past two years, the NFT market and many metaverse businesses have flunked in spectacular fashion in Q3 of 2022.
As the world deepens into a financial recession, many thought digital currencies would save them from the pinch. Unfortunately, cryptocurrencies like Bitcoin and Ethereum crashed this year and many overnight millionaires and businesses that hedged their bets on binary banks lost billions.
As the Web3.0 movement still pushed forward despite the digital asset market being in turbulent flux, what does this mean for our blockchain-powered future?
The crypto crash
This year saw two major cryptocurrency crashes occurring that shook the foundations of the digital currency market, including traditional financial markets. The crypto crashes were a symptom of our global economic recession causing a lot of uncertainty in the financial markets. Crypto assets and traditional assets (stocks, funds, etc.) are highly correlated now, so when one goes down the other one follows suit.
The most significant element that some view as the lynchpin for the crypto crash was the Luna crypto network collapse which saw an estimated $60 billion erased from the digital currency space. This resulted in a cryptocurrency turmoil which lead to American crypto lender Celsius Network suspending all withdrawals and eventually filing for bankrupcy.
As a result, in early September 2022 Bitcoin dropped to its lowest value since December 2020. The drop comes after the crypto market lost more than $200 billion in August 2022.
This shook the global cryptocurrency market as it resulted in a liquidity crunch in the cryptocurrency space that the industry is still trying to recover from.
The crypto crash’s collateral damage
When cryptocurrencies crashed, so too did the markets related to them. Unsurprisingly, the correlated collapse of the NFT market has fallen under the radar. Despite consumer confidence declining since February 2022, the June crypto crash caused an almost 90% drop in NFT marketplace transactions.
NFTs constitute a small aspect of the crypto ecosystem and are considered to be more risky and volatile assets defined by a “high-risk/high-reward” approach. On top of the crypto crash (which sets the base for the tech used to trade NFTs – mainly the Ethereum network), these risky assets don’t do well during times of market instability. Investors prefer not to ‘gamble’ with this new type of assets, since both retailers and big institutions prefer to save their cash or park it in safer options, resulting in the decline of NFT trading.
Additionally, the metaverse digital real estate market, which experienced mainstream popularity and millions of dollars worth of investment is now sinking. According to Forbes, “the weekly volume of property purchased across the top-five metaverse worlds has fallen to $650,000 for the week of August 7 2022, down from $62.5 million in mid-November 2021, a drop of nearly 99%”.
Why the crypto crash isn’t all that bad
Thousands of eager would-be and legitimate investors have lost millions thanks to the crypto crash and volatility in traditional financial markets which, of course, is not good at all. However, the crash revealed something bigger that might serve the Web3.0 movement as it reestablishes itself.
- Weeded out illegitimate players
Many crypto businesses went bankrupt due to the crash, with only the legitimate ones able to weather the storm. This shone a spotlight on the many seemingly illegitimate businesses founded on smoke and mirrors that folded quickly due to improper protocols and some outright shenanigans.
- New crypto laws and regulations
Yuga Labs, creators of the widely popular and lucrative Bored Apes Yacht Club (BAYC), is facing a potential class action lawsuit for inflated valuations of its popular BAYC NFTs. Claims have been made that the $4 billion startup artificially boosted the price of its crypto assets through celebrity endorsements which led to massive losses for investors.
This potential lawsuit highlights the grey areas of how current financial regulations and policies are trying to tackle the crypto market. According to Bloomberg Law, there have been well over 200 class action lawsuits in the crypto space since March 2022, up 50% since 2020. The US government is in the process of developing new crypto policies which will no doubt see these numbers climb. “The rise in litigation is encouraging Big Law operations to bolster their crypto practices,” says the report.
Instances like these have ushered change in the crypto landscape that call for stricter laws, governance, and oversight across the world. The EU has now brought crypto-assets, crypto-assets issuers, and crypto-asset service providers under a regulatory framework for the first time. The aim is to protect consumers against some of the associated risks of crypto-asset investment.
The USA has developed a similar regulatory framework designed to ease borderless transactions and tackle fraid in the digital space. This move has been met with criticism as investors see the US government’s involvement in the crypto space a major overstep and against what the movement is all about – decentralisation.
- Crypto assets considered as securities
The US Chairman of the Securities and Exchange Commission has recently hinted that staked cryptocurrencies might be subject to regulations and that staked crypto might be seen as securities. Proof-of-stake coins have certain contract elements that might require SEC regulations.
Are NFTs and the metaverse still the future?
Despite the current turmoil faced by the crypto market, the industry still seems set to reshape our future digital society as major brands pump more capital into Web3 ventures.
Disney recently showed its hand in committing to establish a strong presence in Web3 when a job listing for a principal counsel specialising in NFTs and decentralised finance (DeFi) was announced. This comes after the company’s recent partnership with VeVe selling branded digital collectables. These moves have assured many investors about the company’s intentions for Web3 expansion across the Disney ecosystem.
And it looks like the NFT market is on the up as the remaining projects that didn’t crash completely are surging ahead. More funding is being placed into NFT projects that are inspiring investors and helping to improve the stability of the market. Doodles recently raised $54 million of equity funding backed by major media companies. This shows that NFT investment is still seen to be a good move by major investors.
Adding to the resurrection hopes for the NFT market, Apple is now allowing NFT sales on the App Store. However, the tech giant will take 30% of all NFT in-app purchases and all transactions must be paid in USD, not cryptocurrency. This has caused some frustration with users and investors as the banning of cryptocurrencies for purchases goes against what the Web3 movement stands for. But, it’s progress for now.
As for the metaverse market, it also seems to be gaining momentum despite the current economic slump. Major brands are continuing to invest in metaverse initiatives and activations, inspiring others to get back in on the bandwagon. Walmart has launched a metaverse experience in the online gaming platform Roblox as a way to sell toys to kids.
And let’s not forget, the world’s biggest social media conglomerate Meta is investing billions of dollars to bring the metaverse into the mainstream. It is clear that Zuckerberg’s army thinks the metaverse is the next evolution of the internet and they want to be at the forefront of it.
Now that the fervent hype surrounding NFTs, cryptocurrencies, and the metaverse has died, things look more realistic and will perhaps move at a normal pace. The silliness of the NFT wave we experienced in 2021 was never sustainable, but it certainly got the mainstream aware of the potential of Web3 very quickly.
The crash has weeded out the illegitimate players and the ones that remain are poised to lay the foundation for the market’s rebirth – with sanity prevailing hopefully. Now is a good time to keep an eye on what the major players are doing to see their direction in the next few years. After all, their moves will determine how we as a global digital society will end up using this technology in the near future, so watch wisely.