NFT Cycle Rotation: Wild, Bubble, and Value Return

Author: NFTGo

Key Takeaway

The NFT trading volume cycle features characteristics such as "hotspot ignition," "from large to small," and "continuity." The market is currently riding the wave of a large cycle extension.

The development stage of NFTs has shifted from "mass media" to "community dissemination," with its speculation cycle showing "sector rotation."

Currently, the NFT market is in a transitional phase between the "expectation expansion period" and the "bubble burst period," which is similar to the traditional crypto market but also has its differences, with events strongly correlated to prices.

The NFT market is inevitably influenced by the overall crypto market; however, the NFT market tends to react more "slowly." When the market experiences significant fluctuations, the NFT market often does not respond quickly. Despite the continuous decline in Ethereum's market value, the NFT market value has not directly followed suit.

Sub-industries associated with NFTs, such as blockchain games, DAOs, and derivatives, have all entered different independent development stages.

NFTs have been developing for about 10 years, evolving from initial artistic creations and thought experiments to a deep integration with the market over the past two years, gradually revealing the cyclical nature of the NFT market.

From a macro perspective, this is the inevitable path of an emerging product: from obscurity to widespread popularity, NFTs have gone through a process from "zero value" to "bubble" and ultimately returned to a value that aligns with their positioning, becoming practical products in Web3.

Unavoidable Cyclicality

Like the traditional stock market, the NFT market exhibits cyclicality even as the overall market value rises in the short term. This is reflected in the "heat cycle" primarily based on trading volume and the "speculation cycle" represented by the price curves of blue-chip projects.

Heat Cycle

As the topic of NFTs begins to rise, the overall trading volume in the NFT market also starts to increase gradually, showing a strong correlation over time. By analyzing these trends, we can determine that the period from July to September 2021 was the first heat-up period for NFTs, characterized by small amplitude and short duration, laying the groundwork for subsequent explosions; the period from January to February 2022 marked the second heat explosion for NFTs, with trading volume increasing fivefold compared to before, and lasting for a longer time. What patterns can we identify from this?

Global Google search trends for NFTs from 2021 to 2022; Data source: Google Trends

NFT market trading volume from 2021 to 2022; Data source: NFTGo.io

Combining the chart below, we can explore the characteristics of the small trading volume cycle from July to September 2021.

First, the cycle's initiation requires an "ignition point," often driven by an event that boosts topic heat, leading to stage "1," which ignites the first wave of enthusiasm, continuously impacting trading volume peaks; subsequently, due to the continuation effect, stage "2" occurs, where trading volume peaks gradually diminish and eventually stabilize. This is a small heat cycle characterized by "ignition point," "from large to small," and "continuity."

NFT market trading volume from 2021 to 2022 (Source: NFTGo.io)

From the above, it can be seen that the current NFT market still inherits the genes of the crypto market. The chart below shows a period of total market value in the crypto market from 2017 to 2018, where we can find the previous three characteristics. We can also see that after the trend began in November 2017, it triggered three waves from large to small, which is the difference between large cycles and small cycles; higher peaks lead to more extended waves. If we extrapolate this to the NFT market, after experiencing the peak in January 2022, the NFT market is still in the extended wave of the large cycle that began in January this year.

Total crypto trading volume from May 2017 to September 2018 (Source: CMC)

Development Stages

Each market "ignition point" is related to "Hype." We can divide the dissemination stages of NFTs into: mass media dissemination and community dissemination Hype. The hype surrounding NFTs is also driven by media and is related to the initial attributes of "art collection."

Hotspot Events Driving

Art NFTs are very much in line with the Hype cycle. In March last year, the NFT created by artist Beeple sold for over $60 million, immediately attracting mass media interest in the NFT industry. Through media dissemination, this led to price increases for other art NFTs in the market at the same time. The subsequent participation of celebrities like Takashi Murakami and Snoop Dogg further turned NFTs into a new darling of mass media, successfully "igniting" the NFT market through hotspot events for the first time.

Beeple's "Priceless" Work and CryptoPunks

Community and Trend Consumption Power

With the emergence of PFP projects led by Cryptopunks and BAYC, the dissemination cycle has seen a corresponding demarcation—the concept of community Clubs began to spread, and the resulting surge in PFP project releases divided people into various community factions. In a hive network, everyone is a dissemination point, and the speculation phase gradually shifted to community-driven speculation, with information distribution channels changing from "top-down" to "bottom-up," leading to the phenomenon of celebrities and influencers competing to purchase NFTs in the NFT trend consumption. As a result, the trading volume in the NFT market first broke new highs in July.

Sector Rotation

Similar to the traditional digital market, NFT development exhibits a rotation of category divisions.

Last year, the rotation of speculative sectors in the crypto market was: Storage ------ DeFi ------ NFT ------ GameFi ------ Layer2 ------ Public Chain ------ Stablecoin.

The rotation of speculative concepts in NFTs roughly includes: Art ------ Chain ------ Sports ------ PFP ------ GameFi ------ DAO ------ Music ------ Pass.

We can also see that NFTs have transitioned from high-priced auction items initially promoted by the media to consumer goods, then gradually becoming investment products and symbols of identity based on community, ultimately landing on products that can be practically applied in games and Pass.

Liquidity across sectors (Source: NFTGo.io)

There are many interconnected events with the digital market, such as the GameFi games in the second half of last year and the surge of the Metaverse combined with NFTs, leading to the overall prosperity of the GameFi NFT market, such as Axie Infinity and The Sandbox; the second connection is that after DeFi and GameFi, the market revolves around concepts like "xFi" and "x-to-earn," leading to speculation around concepts like SocialFi, StudyFi, SportFi, which raised the market value of related projects and increased trading volume for these NFTs.

Land auction in The Sandbox

Additionally, it is worth mentioning that in January of this year, the PFP category once again sparked a blue-chip craze. Initially, the rising floor prices of CryptoPunks, BAYC, etc., brought about topic speculation, heating up the market sentiment for NFTs and generating expectations for the rise of quality projects, leading to a resurgence of FOMO sentiment for early blue-chip projects, thus driving up the trading volume of projects like Azuki, Clone X, and mfer, resulting in the overall prosperity of the NFT market in January.

Total NFT trading volume in January 2022; Data source: NFTGo.io

Quantitative Comparison of Top Project Cycle Market Performance

In the heat cycle, many NFT prices reached historical highs at the peaks of the heat cycle. However, as market sentiment cooled, the prices of these projects began to decline.

The following analysis focuses on the small cycle from January 1, 2022, to February 15, 2022, further analyzing the reasons behind the surge in trading volume and comparing the performance of different NFT projects under the current market sentiment from May 1, 2022, to May 15, 2022.

Referring to the following formula, we consider an absolute change of 8% or more in the average price of collectibles as a marker of market sentiment change.
The price changes are categorized as follows:
• Price change -8% or below: Decline
• Price change +8% or above: Increase
• Price change range -8% to +8%: Stable

To test the macro trend of the market, we applied this analysis method to two time intervals. The first phase was the NFT bull market, and the second phase was the current NFT bear market. The table below shows the percentage of days that the average price of 16 different NFT collectibles increased, decreased, or remained stable.

It is not difficult to see that at the beginning of the year, the proportion of NFT prices increasing by more than 8% was relatively high, including: Doodles, Azuki, mfers, and Meebits. On one hand, the new projects launched at the beginning of the year attracted a large number of whales and investors, driving the overall FOMO market sentiment. On the other hand, during the bull market, many established top projects remained stable in price most of the time. The NFT bull market was still market hotspot-driven, with new projects entering a stable price phase after experiencing the volatility of issuance, followed by fluctuations again with subsequent events.

Data source: NFTGo.io

From early May to mid-May, the NFT market also entered a cooling period along with the digital market, clearly showing that the proportion of days with price declines increased significantly compared to the previous bull market, while the proportion of days with increases decreased, placing the overall market in a downward range. In the bear market, the performance of top NFT projects is controlled by overall market sentiment; even top projects often have more days of price declines than increases.

Data source: NFTGo.io

Project Development Cycle

Hype is an important factor in attracting attention to the NFT market. In terms of price influence, projects gain attention primarily through three methods.

The earliest method was price speculation. In April 2021, early hashmasks brought a successful speculation method, where the sale adopted a joint curve—sale prices increased over time. This method led to the last three avatars of hashmask being traded at 100E, successfully attracting attention. However, this method of generating FOMO through price was later abandoned by projects represented by BAYC.

The second method involves celebrities and KOLs joining to create speculation hotspots, such as BAYC attracting some celebrities who changed their avatars to BAYC. This method is now seen as one of the best exposure models for quickly attracting attention in the early stages of a project. As PFP NFTs, avatars are an important manifestation of their "utility."

The third method is empowering NFTs during the mid-development phase of a project, generating topic speculation by providing benefits to community members, such as airdrops and merchandise in projects like BAYC and Azuki. It is undeniable that BAYC's speculation has been maximally leveraged in this approach, with airdrops of MAYC, Apecoin, Otherside, etc., causing a "breaking the circle phenomenon" for early holders.

By analyzing the events in the chart below, we can see the price impact brought by BAYC's application of the above methods of speculation.

Event and BAYC price correlation chart; Data source: NFTGo.io

Event Timeline:

2021
August: Bored Ape Yacht Club announces an airdrop of MAYC for holders.
August 30: NBA star Stephen Curry purchases BAYC.
November 12: Multiple Grammy Award winner Timbaland announces that his newly established studio will use BAYC NFTs to create music and animations.
December 22: Rapper Snoop Dogg announces the purchase of BAYC.

2022
January 1: Rapper Eminem purchases an avatar to join the BAYC community.
January 12: Billionaire Mark Cuban mutates his ape.
February 2: Famous host Jimmy Fallon announces on the Jimmy Fallon show that he is a member of BAYC.
February 12: Co-founder of Black Rifle Coffee Company wears a BAYC shirt at the New York Stock Exchange opening.
March: Releases ecological Token Apecoin.
April: Releases metaverse concept land Otherside.

What Stage Are We Currently In?

Lifecycle

Lifecycle; Data source: NFTGo.io

The lifecycle of a new technology from "birth to use" can generally be divided into several key stages in its early phase:

1. Technology Emergence Phase:
   Early concept validation reports and media attention generate widespread publicity, but there are usually no usable products, and commercial viability has not been proven.

2. Expectation Expansion Phase:
   Early publicity generates some successful cases, often accompanied by multiple failures. A few companies take action, but most do not.

3. Bubble Burst Phase:
   As experimental projects gradually fail, people's interest wanes. Most failed projects are abandoned, and only surviving projects improve their products, leading to continued investment in the market.

4. Value Realization Phase:
   The previously dazzling technologies and projects gradually reveal their value after undergoing cleansing and sedimentation; this phase is characterized by non-bubble value increases.

Based on these characteristics, the NFT market is currently in the "expectation expansion phase" and the "bubble burst phase." Early publicity has generated successful projects, such as those from Yuga Labs and Axie Infinity, which have become top projects in different tracks, while most other projects that failed to seize the opportunity and lacked sufficient strength will be eliminated, leading to a "survival of the fittest" scenario in the NFT market. This is similar to the crypto market's experience after the ICO wave in 2016-2017, which entered a "bubble burst phase," eliminating a large number of inferior projects.

Market temporarily declines after the 2018 wave; Data source: CMC

Comparison with the Crypto Market

Roughly speaking, the current NFT market size is approximately similar to that of the crypto market in 2017. After the total market value of the crypto market first reached 20 trillion in January 2017, it began a brief downward trend, losing a quarter of its total market value in two weeks, followed by two months of continuous recovery before entering an upward trend. The NFT market may also experience a similar adjustment cycle.

The NFT market shares similarities and differences with the traditional crypto market. Currently, the NFT market is highly correlated with the traditional crypto market and is inevitably influenced by the overall market trend. However, the NFT market tends to react more "slowly" than the traditional cryptocurrency market. When the market experiences significant fluctuations, the NFT market often does not respond quickly. As seen in the chart below, despite the continuous decline in Ethereum's market value, the NFT market value has not directly followed suit.

Comparison of ETH market value and NFT market value; Data source: NFTGo.io

The main reasons for this are as follows:

1. Poor Liquidity: It requires a long time on the market to wait for transactions without lowering prices.

2. Network Congestion: Major market movements can lead to network congestion and soaring GAS fees, resulting in high transaction fees for NFTs, which reduces the number of people choosing to sell or buy, causing a decline in trading volume while the floor price remains relatively stable.

3. Asset Diversification: During an overall market downturn, users holding digital assets may choose to convert them into NFTs to avoid volatility, stimulating the NFT market. In such cases, NFT prices may not respond quickly to the crypto market, leading to a reverse development in specific situations. In other words, some stable NFT projects may be chosen as diversified safe-haven assets during a downturn in the crypto market.

Conclusion

Market trends always come like waves and recede like tides. While we can see that the NFT market is in a certain cycle of waves, it is more important to recognize the future development and market cap ceiling of NFTs.

The NFT market is still valued in the tens of billions, which leaves significant room for growth compared to other sectors in the crypto market, such as DeFi. Emerging phenomena inevitably come with speculative bubbles in their early development stages, but they will eventually usher in a magnificent rise in market value, just as the cryptocurrency market grew from a few billion in 2017 to a trillion in 2022, experiencing concept speculation, bubble bursts, survival of the fittest, and new narratives and applications. Therefore, when dealing with emerging phenomena, we must be wary of bubbles while also believing in innovation, so that we can stay at the forefront of the new era.