NFTs, the next market in peril?

After the fall of the cryptocurrency and stablecoin market, is the NFT market the next market to watch closely? That’s what analysts at Morgan Stanley Bank think.

After the storm experienced in the cryptocurrency market and in the stablecoin market, will the ecosystem experience new shocks? Yes, estimates the American bank Morgan Stanley in a new note.

“Hop and leveraged areas of crypto, such as decentralized finance (DeFi) and stablecoins backed by other cryptocurrencies are seeing massive sell-offs. As it becomes increasingly clear that all high prices were traded on speculation, with limited real user demand,” said Morgan Stanley analyst Sheena Shah.

The bank refers in particular to the episode of the Terra blockchain, and the collapse of its algorithmic stablecoin the terra usd (UST) as well as the cryptocurrency luna. Last week, the biggest stablecoin in history, Tether’s USDT, fell slightly and is now closely watched by investors. The stablecoin market remains fragile today: on Monday, another algorithmic stablecoin, the DEI, lost its peg against the dollar, falling as low as $0.50 (against a promise of 1 DEI = 1 dollar). A new dive that makes others fear in the coming days.

“Stablecoins have become an important part of the leverage built into the decentralized finance ecosystem. This event has led to increased uncertainty and instability which has led to a broader reassessment of where many prices of cryptocurrencies are expected to trade,” the note points out.

The bank also has reservations about decentralized finance, at a time when many regulators are considering strict regulation of this universe. “With the fall in cryptocurrency and stablecoin prices, borrowers of decentralized finance platforms risk suffering from margin calls”, estimates the bank.

“NFTs have been the subject of much speculation”

In this context, Morgan Stanley considers that certain markets should be watched closely. She cites in particular the “most speculative and leveraged areas”, in particular NFTs and virtual courts that it is possible to buy in decentralized universes like in The Sandbox, sometimes at totally exorbitant prices. “NFTs and digital lands have been the subject of much speculation and influx, which some regulators believe may even be in part illicit flows,” the note points out.

As a reminder, an NFT (“Non Fungible Token” or non-fungible token) is a digital title, issued by a blockchain (mainly Ethereum), and associated with a digital asset (photo, video, etc.). Each NFT is unique and cannot be reproduced. NFTs are used in art, the luxury sector or for trading cards in sports.

With a booming market last year, some people bought NFTs hoping to resell them for more later. Still, some NFT owners are drinking the cup a year later. This is particularly the case of the entrepreneur Sina Estavi. Riding the wave of NFTs, he bought last March the first tweet in history posted by Jack Dorsey in 2006, for the sum of 2.9 million dollars. Half April, he tried to resell it, except that almost no one wants it: the latter only collected about twenty offers, the highest being 3.3 ethers, or about 10,073 dollars.

“The term NFT only appears three times in the entire report, which makes this claim that NFTs are the next to watch after the Terra blockchain stablecoin crash all the more surprising. I don’t actually understand the validity of this parallel stablecoin and NFT”, explains to BFM Crypto Gauthier Zuppinger, COO (director of operations) of NonFungible.com.

The latter points in particular to the speculative nature of the NFT market mentioned by the bank. According to a survey of 400 people in March 2022 by NonFungible.com, a third of respondents buy an NFT in the first place for its financial potential, others do it for other reasons such as to support artists and creators.

Annual NFT Report published by NonFungible.com in March 2022
Annual report on NFT published by NonFungible.com in March 2022 © Source: NonFungible.com

“No offense to some, it would seem that the NFT industry is not just a gigantic Ponzi, but that this ecosystem rests on a little more solid foundations than short-term profit”, underlines Gauthier Zuppinger.

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