Here Is Why NFT Market Will Go Down to Zero Quicker Than You Think
hi frens 🤠
I know, we are coming in hot. A clickbait title, they say. However, as you will see later if you keep reading this article, there are reasons for it and it is not clickbait as you think it is. Today’s focus will be on crypto lending platforms, more specifically BendDAO.
First of all, what is BendDAO?
As per their official definition on their site, BendDAO is a platform where you can use your NFTs as a collateral to borrow ETH as well as deposit your own ETH and earn yields for doing that. Our focus will be on the borrowing side of it.
Let’s make it simple.
Like in the traditional finance, to get a loan, you have to deposit something with the institution (i.e. collateral) in order to be able to get that loan. Usually, the collateral amount is always higher than the amount of the loan.
Let’s say you want to get a $20k loan. Depending from the institution, usually it might be between 120-150% of the loan amount. Meaning that if you want to get the $20k loan, you have to provide the bank something that is worth $24-$30k and transfer the ownership to them.
Now, let’s say you face financial difficulty of some sort, bank has the right to go in the market and liquidate (sell) that asset to get the amount of the loan they gave you initially, hence they always ask to provide something that is worth more than the money they give you initially.
Now that we understood the concept, let’s get back to BendDAO.
BendDAO is the “bank” who offers the ETH (money) if you leave your NFT (collateral) with them. As we have seen, crypto space is way more volatile compared to the traditional financial market. Hence, institutions like BendDAO require way higher collateral value, meaning that they can ask your to provide something that is worth 200% more than the amount of ETH you will be able to borrow from them. In their specific case, you were able to get roughly 40% of the floor price of that particular NFT project as a loan.
While this works perfectly fine in situations when market is doing well, bad things can happen when market is going down. Like it has happened for the last 8 months. Cryptocurrency prices and NFT projects have plummeted and there is no hope (at least for now) that those prices will ever recover.
So what can happen?
Well, while market was doing good, everyone was getting excited. Prices just kept going up. Almost every NFT project was launching successfully and they would have no issue getting the traction needed for launch. A monkey picture would sell for hundreds of thousands of dollars and yet people found that a reasonable thing to do.
If you were to challenge them on the actual value that comes from that specific JPEG they purchased, they actually had no rationale besides “look, it was 50ETH a month ago, now it is 65ETH..” kind of response.
BendDAO saw this as a good opportunity to offer a service where they would take your NFT as collateral and then borrow you ETH against it. Offering those services to all NFT projects, of course that wouldn’t be reasonable as most of the projects have gone down in value 99.99%. Their focus was on the top NFT projects such as BAYC, Cryptopunks, Doodles, Azuki, CloneX etc..
Even those top projects have seen massive decreases in prices. Let’s take BAYC as an example.
Highest floor price 153.7ETH, ETH price=$2,727 (April 30th 2022)
Today’s floor price 68.48ETH, ETH price=$1,620
If we do some basic math, it means if someone bought at its peak, they paid $419k which is worth only $111k today. A massive ~$300k loss.
Here’s the issue though. Since even “blue chip” NFT projects are going down in value, they risk being margin called. ‘Margin call’ is this fancy term used when BendDAO will be selling NFTs left as a collateral if the borrower won’t add additional liquidity(ETH) to their account.
And this is exactly what is happening those days. Prices are down a lot already, to the point where they are being margin called and sold in the market. Cirrus, showed some great stats on a Twitter thread on what exactly has happened.
Totally worth reading.
As per his tweet, 85% of those loans were taken on BAYC and MAYC when floor prices were 125+ETH and 30ETH respectively.
As of now, roughly 3% of BAYC NFTs are used as a collateral in BendDAO platform. One would say, that is not a lot although it is a lot if you think about the impact it can have. This can create a massive sell pressure even among those who are not necessarily using their NFT as a collateral for a loan. If floor price keeps going lower, there will be more BAYC NFTs who will get liquidated. That will make existing holders panic sell as they are already loosing a lot from when the markets were up. Then this goes in circle. More BAYC NFTs are available for sale, owners will cut each other in price trying to exit faster.
Like we saw earlier, even other projects are part of platform like this. Not to mention that there are lot more platforms like BendDAO who are lending money against an NFT. Considering that all “blue chip” projects are part of such lending platforms, they risk of going down in value as well.
But for NFTs to go down to zero?!
Guess what?! All this NFT market creates value mainly using speculative techniques by creating hype on something that might come as a value in the future. Market is smarter than you might think. If those big projects go down in value, then the entire market will crash. I mean, most of them already went down in value more than 99%.
One thing is for sure, if cryptocurrency prices do not recover anytime soon, people will loose interest on NFT projects. Floor prices will go down. There will be a lot more margin calls and positions getting liquidated. Slowly go down to zero.
I know this is a hot take. I know that wealth has been created in similar situation when hope was lost, but seeing all the sell-of pressure with the current crypto market conditions, there is not much left and it might go down to zero quicker than you think.
Even the founder of BendDAO risks of getting liquidated by his own platform 😂
That’s it.