August 7, 2023
By Anjali Kochhar
The NFT market has recently experienced a liquidity shortage. Previously, it was booming with massive liquidity and extraordinary interest. This has been hampered by a number of challenges, including skepticism regarding the usefulness and long-term value of NFTs, governmental prohibitions, and technological limitations. Overall liquidity has also been impacted by the increased rivalry to attract a very narrow pool of investors, as some investors are delaying their support for new NFT firms in favor of more established ones. Additionally, economic issues like rising inflation have affected investor behavior and altered their investment choices. This article explores the causes of the poor liquidity of the NFT market.
The Cause For A Drop In Liquidity
The declining liquidity of the NFT market has a number of explanations. To start, there has been less trading activity as a result of investors’ trepidation regarding the usability and long-term worth of NFTs. Investors are becoming more picky, favoring well-known and established NFT initiatives over fresh and unproven ones, which has an impact on liquidity. Regulations and technological constraints are also deterring NFT trade and investment.
Shubham Gupta, Co-Founder & Chief Product Officer at Bengaluru-based Web firm STAN, opines that another significant element behind the loss in liquidity is the current slow or bear market phase in the larger economy and the cryptocurrency market. Trading activity has decreased as institutions and NFT enthusiasts prioritize utility-driven efforts over enthusiasm. NFTs first rode the tide of uncommon interest and metaverse buzz. Global economic downturns, geopolitical events, and the cyclical nature of the cryptocurrency market are all factors that affect investor behavior and liquidity in the NFT market. Despite these difficulties, the NFT community is optimistic about the future and steadfastly believes in the NFTs’ long-term promise. Reversals have heightened awareness and commitment to ongoing improvement and expansion, reflecting the fundamental evolutionary path of any market.
The Competition For A Compact Investor Pool And Its Impact
The total liquidity in the NFT market is being impacted by the rising competition for a very small pool of investors. NFTs have less liquidity than cryptocurrencies because of the distinctive characteristics of the assets and the challenges in connecting sellers and purchasers. The limited number of players and collectors’ tendency to hold onto NFTs result in scarcity, which lowers trade activity and makes estimating the true value of NFTs challenging. As a result, price manipulation, distortion, and increased volatility increase, posing risks to investors, according to Mr Saravanan
Jaichandaran, Co-Founder & Chief Data Scientist of Dubin-based blockchain analytics firm BitsCrunch.
The liquidity problem is made worse by the availability of comparable NFT ventures that neither add value nor are innovative. While competition fosters innovation and might ultimately result in the success of the best platforms, it also makes the liquidity issue worse in the near term. Overall, the NFT market’s liquidity issues are a result of the increased competition for a small pool of investors.
The Interconnection With Inflation
Kumar Gaurav, Founder and Chief Executive Officer of payments firm Cashaa suggests that once inflation returns to normal levels, the NFT market’s liquidity issue should get better, albeit this may not be the only deciding factor. Investors usually look for alternate assets to preserve their capital during periods of high inflation, which could raise interest in NFTs and possibly increase their liquidity. It is important to remember, however, that the blockchain network where NFTs are traded mostly regulates their liquidity. Liquidity is significantly influenced by the size of the network, the volume of transactions, and the total demand for NFTs.
Because of this, the liquidity of the NFT market will be decided by a combination of features particular to blockchain networks and the larger crypto market, even though lower inflation may allay some general investment concerns. Even once inflation cools and the economic environment stabilizes, NFTs can regain strength and liquidity as the NFT industry develops and technology progresses.
What’s The Solution?
In the current atmosphere of elevated inflation, people’s enthusiasm for investing in unconventional assets like NFTs varies depending on individual opinions. Due to the declining interest in NFTs and recent declines in the cryptocurrency market, some investors might be leery. In order to find stability during unpredictably fluctuating economic times, they can prefer more conventional investments like stocks or real estate. On the other hand, some investors embrace the uniqueness and decentralization of NFTs and view them as potential hedges against changes in conventional financial systems. Uncertainty has been exacerbated by problems with the NFT market, such as scams and value declines.
However, asset-backed NFTs foster trust and offer a more tangible form of investing, particularly those backed by real-world assets (RWA) like real estate or fine art. Asset-backed NFTs may increase the market’s attractiveness as the NFT industry develops and provide a potentially secure option during periods of excessive inflation. Investors must carefully consider their financial goals and reach well-informed decisions if they are to successfully navigate the complexities of the NFT market in these uncertain times.
To encourage investment and liquidity, NFT markets give out rewards and bonus points. While these strategies might draw traders and boost short-term trading activity, the strategy’s long-term viability needs to be taken into account. Simply using incentives could have unintended consequences like market manipulation and artificial demand surges. NFT marketplaces should give tackling fundamental liquidity issues and fortifying an ecosystem top priority in order to achieve a long-term solution. Gaining genuine interest and investment in NFTs requires developing trust, fostering openness, and supporting innovation.
Jaichandaran of BitsCrunch adds that the NFT marketplace may be made even better by offering safer and more secure trading environments and by utilizing cutting-edge analytical methods. NFTs must adopt a balanced strategy that combines incentives with genuine value and usefulness in order to promote long-term growth and draw in a larger audience of investors and traders.
Conclusion
In conclusion, the NFT market’s declining liquidity is a complicated problem caused by a variety of causes. Regulatory restrictions, technology limitations, economic conditions including rising inflation, and uncertainty regarding the utility and long-term value of NFTs have all had an impact on investor behavior and trading activity. In order to revive liquidity and maintain interest in the NFT market, a balanced strategy that stresses genuine value, transparency, and innovation will be essential. The NFT market will be able to proceed along its evolutionary path toward a more strong and dynamic future by addressing these concerns.
About the author
Anjali Kochhar covers cryptocurrency stories in India as well as globally. Having been in the field of media and journalism for over three years now, she has developed a sharp news sense and works hard to present information that goes beyond the obvious. She is an avid reader and loves writing on a wide range of subjects.