Cryptocurrencies and non-fungible tokens (NFTs) are deeply interconnected. In its nascent stages, the NFT market was essentially a subordinate to the broader cryptocurrency domain. Its small scale meant it was heavily influenced by movements and trends in the cryptocurrency market.
The NFT landscape has undergone substantial evolution over time. The once fledgling market occupied a small niche but grew substantially, exploding into the mainstream consciousness in 2021. Catalyzed by celebrity endorsements, NFTs quickly grew out of their original niche.
Collections such as Bored Ape Yacht Club infiltrated popular culture and emerged as coveted symbols of status and prestige. With the passage of time, the relationship between NFTs and crypto has become more nuanced. That nuance supports the claim made by NFT industry advocates that NFTs are their own distinct, self-sustaining market entity.
Those advocates say that the complex relationship between digital assets like NFTs and conventional cryptocurrencies highlights the need for a comprehensive understanding and analysis of each sector’s distinctive characteristics and use cases.
“While cryptocurrencies are closely related to other financial instruments, such as stocks and bonds, it is believed that, at least currently, NFTs have an art and community aspect that distinguishes them,” said Daisaku Harada, chief of NFT marketplace Unikura.
NFTs have recently shown a noticeable decoupling from the broader cryptocurrency landscape. Downward movement in NFT prices this year occurred at a later date than the downturn in the cryptocurrency market. This is a phenomenon known as the “lag effect,” which refers to a delayed reflection of cryptocurrency movement in the NFT market.
The lag effect
According to data from CoinGecko, the market capitalization of the cryptocurrency market peaked at over US$3 trillion in November 2021.
Yet, it was only in January 2022, when the total crypto market cap had already fallen to US$1.65 trillion, that the NFT market found its top. According to the Forkast 500 NFT Index, a gauge for NFT market performance, the market’s peak came on Jan. 19, 2022.
This is not the only example of erratic price behavior. Data suggests that not only the peaks differ, but the valleys too.
The crypto industry reached its lowest level in recent years in December 2022. That followed the collapse of the FTX cryptocurrency exchange, leading to the current extended bear market. However, the NFT space is only now finding its bottom. The Forkast 500 NFT index value dropped below 2,000 on Sept. 24, the first time it has done so since data recording started in January 2022.
Carlos Prada, the CEO of blockchain accelerator Masterblox, believes that the market will continue falling as the previous surge in NFT demand was predominantly catalyzed by traditional retail liquidity.
“A discernible shift has been observed as these investors, with a maturing understanding of the digital asset space, recalibrate their strategies, often distancing themselves from transient market exuberance. This is palpable not only in the NFT domain but also in emergent sectors such as the metaverse and play-to-earn ecosystems,” said Prada.
“As we pivot our focus to capital inflow, particularly from the venture side, the current scenario paints a rather tepid picture. The influx of capital into NFT-centric enterprises, including those underpinning the infrastructure, appears to be negligible,” he added.
Is the worst yet to come?
The NFT sector, being relatively nascent, remains hard to predict. Additionally, limited historical data makes it difficult to pinpoint any definitive insights.
Despite the increasing adoption of NFTs by industry giants in fashion, sports, and music, the market’s deepening troughs are cause for concern for industry insiders. This anxiety is further exacerbated by the looming prospect of legal action by the Securities and Exchange Commission (SEC).
In recent enforcement actions, the SEC classified NFTs as securities in cases against the Impact Theory NFT initiative and Stoner Cats, setting the stage for a new regulatory paradigm. This stance by the financial overseer presents considerable ramifications for individual creators, corporations, and trading platforms operating within the domain.
For the time being, the regulatory landscape around NFTs remains unclear. However, entities and artists within the U.S. may soon need to formally register with the SEC to avoid substantial penalties. Should other nations opt to model their regulations after the U.S. framework, the already beleaguered NFT market could meet further headwinds.
Adding to those challenges, some economic experts are predicting a macroeconomic downturn. That could lead to a global recession by late 2023 or early 2024. Taking all these indicators into account, the future seems bearish for NFTs.
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