Major cryptocurrencies are currently enduring price declines from already depressed levels. It’s a selloff, though likely not one large enough to shake the confidence of the crypto faithful. Still, the impact of falling crypto prices on assets priced in crypto should prove interesting.
The NFT market, largely built on the Ethereum blockchain, has seen a rapid ascent in value and trading volumes as the value of ether, the native token of its chain, appreciated massively. What will happen to NFTs in a market in which ether is falling? Let’s talk about it.
How much of a selloff?
In the last week, bitcoin has fallen by 8.6%, ether by 7.8% and Solana’s token by just around 12%, per CoinMarketCap data. Those are sharp declines, even for the more volatile crypto market. From recent highs, the declines are even steeper. From all-time highs set during Q4 2021, bitcoin is off by around 35%, ether 28% and Solana’s token about 40%.
What’s going on? The Wall Street Journal has a pretty succinct explanation today:
Cryptocurrencies led by bitcoin and ether slumped as part of the broader tech selloff, cementing their status among investors as risky assets quickly dumped in moments of market stress.
The falls were triggered by Federal Reserve minutes that showed officials are eyeing a faster timetable for raising interest rates this year. As rates rise, holding volatile investments that produce little income becomes less attractive compared with government bonds.
Simply: As rates rise, less risky assets are more attractive in yield terms; this makes riskier assets less attractive and therefore worth less. Declines in the value of high-growth software stocks are likely driven by similar dynamics in the crypto market. Bitcoin is not an uncorrelated asset, it seems clear at this point.
But what does all of that mean for NFTs? A few things.
Prices, trading and correlations
The boom in NFT value and trading activity does not have a single driving factor. Instead, myriad inputs have been at play, from celebrity involvement to improving technology, better public awareness and more.
Also involved, I would argue, has been the sharp appreciation of ether in the last year or so. In mid-2020, Ethereum’s token could be purchased for less than $250 each. The value of ether tripled by the end of the year and reached the $4,700 mark last year. That enormous appreciation led to the creation of a simply massive amount of paper — token? — wealth. In short, folks holding ether enjoyed huge returns, very quickly.
More than anything else, the wealth created from the appreciation of ether led to the NFT boom, from my perspective. After all, I don’t think that folks have been transferring millions of dollars into ether to buy digital signatures on the blockchain that relate to particular images; instead, I think we’re seeing ether-rich folks gamble with what must feel like house money on non-traditional assets. Not that that is a bad thing; it’s neutral, I reckon. But it does raise the question of what happens to both NFT activity and NFT prices when their backing asset, if we can call ether that, rapidly loses value.
There are several possibilities:
- NFT volume in eth terms may stay strong, even if the resulting dollar equivalent of those transactions will decline.
- NFT volume in eth and dollar terms may decline as crypto optimism fades somewhat and appetites for risk decline in the face of a decrease in aggregate crypto wealth (as measured in fiat).
It’s a fun question to puzzle. If ether loses value, NFTs become cheaper in dollar terms. That could lead to more interest in their purchase, as they have become effectively less costly to folks outside the crypto ecosystem. If you are bullish on folks entering the crypto market to buy NFTs, this could be a profitable dynamic.
But if you, like myself, think that NFT speculation is more an intra-crypto phenomenon, it’s harder to be net-bullish about the NFT market during a period of crypto declines. A crypto winter would be an even stiffer barrier to surmount.
The crypto selloff and the question of what it may mean for NFT activity reminded me of a riff from Coinbase’s S-1 filing. Regarding its platform activity, the U.S. crypto exchange said the following (emphasis added):
Trading Volume is directly correlated with transaction revenue and is influenced by both Bitcoin price and Crypto Asset Volatility. We have experienced periods of low and high Trading Volume, and therefore transaction revenue, driven by periods of rising or declining Bitcoin prices and/or lower or higher Crypto Asset Volatility. During periods of rising Bitcoin prices and higher Crypto Asset Volatility, we have generally observed higher Trading Volume on our platform and across the broader cryptoeconomy.
The company went on to add that “[r]etail Trading Volume is more influenced by Bitcoin price and Crypto Asset Volatility than institutional Trading Volume.” My hunch is that NFT trading is more retail than institutional, so anticipating some declines in NFT activity during periods of crypto price declines feels reasonable given what Coinbase said while going public.
For startups, a less attractive NFT market could sting. OpenSea just closed a huge round at a massive valuation for its NFT marketplace, and TechCrunch has covered a number of events from other NFT markets that want a piece of the action. Falling activity would harm all players currently valued on strong growth expectations.
The Coinbase example may also provide some cover, however. Coinbase itself saw periods of rising and falling revenues, but charted a course to a direct listing regardless. That could provide some near-term confidence to NFT marketplaces if their underlying business takes a hit during the current selloff; if one is a true-blue crypto believer, price declines are simply buying opportunities instead of anything more long-term lethal.
Of course, crypto could bounce back moments or days after this is published. Still, we’re keeping our eyes on NFT data to see what, if any impact we can glean.