Crypto Beginner

What is an NFT bubble, and how does it affect the market?

NFT bubble

Non-Fungible Tokens (NFTs) are blockchain technology-based digital assets that let you own a product. They ensure that the token holder has exclusive access to the ownership rights of the product. NFTs arrived on the scene a few years ago and soon became part of mainstream culture. Retail investors, celebs, and the world’s greatest brands were quick to jump on the NFT bandwagon. As a result, the value of these digital assets surged, with some even fetching millions of dollars. However, as demand and sales grew in 2021, the term “NFT bubble” became common parlance.

Introduction: NFT bubble

What’s an NFT bubble? Here’s where we burst…oops…break it down for you.

Understanding the basics of an NFT bubble

In finance, the term “bubble” refers to a sudden rise in market prices. Such spikes are usually driven by demand and fueled by speculation. In a bubble economy, the price of a commodity or asset may even exceed its inherent value. The internet-centric boom, known as the dot-com bubble, in the late 1990s is an example.

An NFT bubble is just like this dot-com bubble. It refers to the hike in prices of NFTs followed by an eventual pop. Just like a bubble.

How the NFT bubble forms in the crypto market

When new traders enter the market, it is normal for bubbles to form. Prices go up due to hype because traders don’t fully understand the market they’re investing in.

Why the NFT bubble is important for the crypto market

A bubble is often seen as a bad thing, but it isn’t always so. The rapid growth and expansion of the NFT bubble did help a lot of investors make unimaginable amounts of money.

Even the bubble’s bursting comes with its own set of advantages. When the bubble bursts, the motivating factor behind a crypto project may shift from popularity to utility. In fact, several projects are already attempting to add worth to NFTs by focusing on their real-world utility.

How the bubble phenomenon affects the NFT market

The bubble phenomenon affects the NFT market in a number of ways. Below, we discuss one of the main effects.

How the NFT bubble causes the NFT prices to rise

Initially, when NFTs were still on the rise, the mainstream popularity and the bubble led to huge demand. And it sure helped that there weren’t enough NFTs. As a result, through speculation and hype, NFTs managed to garner large sums of money. The NFTs were overvalued quite a bit, resulting in their prices rising astronomically. The average price of an NFT reportedly increased from $150 to $4000.

That is a clear example of the positive effect a bubble can have on prices. However, bubbles burst. And prices fall after such a surge. Especially so if the boom was caused by hype.

How to identify an NFT bubble in the market

You can spot a bubble in the market when assets are selling for absurdly high prices. During a bubble, the price doesn’t justify its value.

Another sign: a bubble always comes with logic-defying demand.

Indications that the NFT bubble might burst

Investing in NFTs can be risky. That’s why it helps to know the early signs of the bubble bursting. The primary ones to watch for are discussed below.

NFT Prices Falling

When NFT prices begin to decline significantly, it is the first red flag. However, a bubble does not necessarily collapse as soon as prices fall. It could take longer.

Reduced Trading Volume

Daily trade volume is a key indicator of the market’s health. When trade volume falls over an extended period of time, the NFT bubble may be set to burst.

If people begin to put their NFT collections up for sale, it may signal that there are numerous sellers but not enough buyers. The NFT bubble may burst if there isn’t anything stopping the prices from falling.

Lower media coverage

Reduced NFT media attention is another clue that perhaps the NFT bubble is likely to burst. On the contrary, when there is much buzz around renowned NFT collections and deals, prices tend to rise.

How the NFT bubble impacts investors and traders

The NFT bubble helps investors and traders who were early to participate in the market. These individuals can get massive returns if they can sell and make all of their trades before the burst. Others may not be so lucky.

Strategies to use when you spot an NFT bubble

So, you’ve spotted a bubble. What next? This is where we tell you what you can do to protect yourself and maybe even profit.

  • Knowing when to buy and sell NFTs: One needs to study the crypto market so that you have an idea of when to buy and sell your NFT.
  • Diversifying your NFT portfolio: Having a diverse portfolio of NFTs means that you are investing in a balanced manner. If one type of NFT is losing its value, you still have other forms to ensure that you are not completely in the red.
  • Keeping an eye on market trends and developments: Being knowledgeable about the market is the key aspect to boosting your chances of success.
  • Being aware of the risks and rewards: The NFT market is quite volatile and unpredictable. Make sure you know what you’re getting into.

Impact of the NFT bubble on the art and collectible market

NFTs are very popular in the art space today. It is an emerging market many art buyers and sellers are keen on. Let’s take a brief stop to examine how the bubble affects this space.

How the NFT bubble affects the traditional art and collectible market

Previously, digital art could be freely copied, downloaded, and redistributed. NFTs not only created a way to check authenticity, and they ensured that digital work could no longer be replicated. This combination allowed art to be acquired and exchanged in the same way that non-digital artworks are.

NFTs are also changing the art business in other ways. Digital artists can now directly sell to collectors via a platform, bypassing dealers and galleries. Second, NFT contracts can include a provision that automatically gives artists a part of any resale transaction.

That led to art NFT amassing huge returns. A bubble in this space, therefore, has a direct impact on this art market. Here too, prices rise and then tumble after the burst.

The potential long-term impact of the NFT bubble on the art and collectible market

While it remains to be seen what the potential long-term impact of the bubble on the art market is, there are some indications of the future. The valuation process is uncertain as there is excess supply and no apparent hierarchy of artists, for instance.

The NFT bubble and its impact on the crypto market

The NFT bubble and the crypto market are interrelated. NFTs are traded through crypto platforms, so anything influencing the NFT market will have an effect on the crypto too.

How the NFT bubble is affecting the crypto market

In its growth phase, the bubble brought a lot of new investors to the crypto market. As new investors observed the huge paybacks of NFTs, a number of traders were attracted to its marketplaces. That has changed a little in recent years after the bubble burst.

The relation between the NFT bubble and other crypto bubbles

The NFT bubble is a major part of other crypto bubbles. They are all linked together as the marketplaces, and the idea behind them as concepts are similar.

The potential long-term impact of an NFT bubble on the crypto market

The bubble bursting will surely impact the crypto market as a whole. As the prices of the NFTs start to fall, so will the tokens used to trade them. But in a market as young as crypto, it is difficult to gauge the long-term effect.

The role of the NFT bubble in the crypto market in the future.

Despite the recent dip in NFT prices, the future of NFTs looks bright. Gartner, a technical research and consulting group, anticipates that by 2026, around 25% of people will spend an hour or more each day in the metaverse. As NFTs become more integrated into people’s daily lives, their value should simultaneously increase.

The significant growth in daily average NFT trading volumes in 2021 signaled the creation of a bubble. The bubble has long burst now. While the NFT market’s initial rise has since subsided, NFTs are managing to survive for now.

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