Blackhole in NFT industry

Recently, Facebook rebranded to Meta Platform.  Only a couple of days after that, Sandbox Game, a metaverse company, announced that they had raised $93M from Softbank VC Fund. Whether you are familiar with Sandbox or not, the news is in the mainstream media. In contrast, has anyone heard of PixelVault’s PlanetDAO or Founders’ Key by Tom Bilyeu?  They both have raised so far about $50-$65M based on an average of $4500/eth through the sale of NFTs in Q3 (which we will explain in more detail later).  In the case of PixelVault, the NFTs sale is ongoing, although they were looking to raise over $265M, the team is semi if not completely anonymous. There is no business plan for evaluation. Nonetheless, it is a very impressive amount raised by an unknown team, even more sizable than what they could have raised via ICO (Initial Coin Offering) back in 2017, although that crashed due to regulatory scrutiny.

NFTs hit a phenomenal milestone of over $10B in sales volumes, or $10.7 billion to be exact, in the third quarter of 2021, compared to a volume of merely $1.3 billion in Q2 and $1.2 billion in Q1.  More impressively, it is an increase from just $13.7 million in the first half of 2020.  NFTs have financialized the creative industry.

While the banana business illustration is humorous, could or would NFT command an exponentially higher return than VC investing?  The answer is both yes and no. In isolated cases, such as for some of the initial collectors of Cryptopunks or BAYC apes (from the latest prestigious crypto NFT club, Bored Apes Yacht Club), and without counting the net gain of collectors’ full portfolios, the ROI is probably around 300-400x for the cost of 0.08 ETH.

Underlying the glamor, there is always the dark side: the blackhole, the rug pull and the rigged projects.  To avoid cheerleading and blind bandwagoning, it’s important to look at the other side of the coin in order to make an informed decision.

There is no doubt that NFT is a huge social and cultural movement with, potentially, a sizable financial upside.  But there is also a downside, including the below.  The article will dive into some details how scammers manipulated big whale collectors’ wallets including Snoop Dogg.

• Low liquidity
• Highly speculative markets dominated with traders and flippers, making its gambling nature inevitable. Small passive collectors would easily lose. Risk is high
• Rug pull – one prominent example is Evolving Apes. Millions of collectors’ dollars are stolen and gone.
• Falsely hyped projects, through the creation of fake transactions that give the impression that big whale collectors are buying the project
• Lots of scams and hacks – in Creaturetoadz’s Discord, where hackers stole almost 100 ETH but returned the money after being caught by the community
• ICO bubble – utilities are good, but the more it is used to fundraise, the sooner the bubble may burst
• Lack of regulation, standard policies and practices incl. insider trading at Opensea

Finally, the article will share some insights about the overall crypto markets as a whole and that correlates with the NFT market.  One big question most would ask is whether the crypto market would crash again and go into a long bear cycle similar to that of 2017 and early 2018 which lasted for 3 years. The answer is that the crypto market in the macro will remain volatile, but won’t repeat the scenario in 2017.

Written by LK Shelley.