Cryptocurrencies and non-fungible tokens (NFTs) are closely linked. In its early stages, the NFT market was essentially subordinate to the broader cryptocurrency domain. Due to its small scale, it was heavily influenced by movements and trends in the cryptocurrency market.
The NFT landscape has undergone significant evolution over time. The once-young market occupied a small niche but grew substantially and exploded into mainstream consciousness in 2021. Catalyzed by celebrity endorsements, NFTs quickly grew out of their original niche.
Collections such as the Bored Ape Yacht Club infiltrated popular culture and emerged as coveted symbols of status and prestige. As time has passed, the relationship between NFTs and crypto has become more nuanced. That nuance supports the claim by NFT industry proponents that NFTs are their own self-sustaining market entity.
These proponents say 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 features and use cases.
“While cryptocurrencies are closely related to other financial instruments such as stocks and bonds, NFTs are considered, at least currently, to have an art and community aspect that sets them apart,” said Daisaku Harada, head of NFT marketplace Unikura.
NFTs have recently shown a noticeable disconnect from the broader cryptocurrency landscape. The downward movement in NFT prices this year occurred at a later time 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 delay effect
According to data from CoinGecko, the market capitalization of the cryptocurrency market peaked at over $3 trillion in November 2021.
Yet it wasn’t until January 2022, when the total crypto market capitalization had already fallen to $1.65 trillion, that the NFT market found its peak. According to the Forkast 500 NFT Index, a measure of the performance of the NFT market, the market’s peak came on January 19, 2022.
This is not the only example of erratic pricing behavior. Data shows that it is not only the peaks that differ, but also the valleys.
The crypto industry reached its lowest level in recent years in December 2022. That followed the collapse of the FTX cryptocurrency exchange, which led to today’s extended bear market. However, the NFT space is only now finding its bottom. The Forkast 500 NFT index value fell below 2,000 on September 24, the first time since data began recording in January 2022.
Carlos Prada, the CEO of blockchain accelerator Masterblox, believes the market will continue to decline because the previous surge in NFT demand was mainly catalyzed by traditional retail liquidity.
“There has been a discernible shift as these investors, with a more mature understanding of the digital asset space, recalibrate their strategies, often distancing themselves from transient market exuberance. This is being felt not only in the NFT domain, but also in emerging sectors such as the metaverse and play-to-earn ecosystems,” said Prada.
“As we shift our focus to capital inflows, especially from the venture side, the current scenario paints a rather tepid picture. Capital inflows into NFT-focused businesses, including those supporting infrastructure, appear to be negligible,” he added.
Is the worst yet to come?
The NFT sector, which is still relatively young, remains difficult to predict. Furthermore, limited historical data makes it difficult to establish definitive insights.
Despite the increasing adoption of NFTs by industry giants in fashion, sports and music, the market’s deeper troughs are a cause for concern for industry insiders. These concerns are compounded 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, paving the way for a new regulatory paradigm. This position of the financial regulator has significant consequences for individual makers, companies and trading platforms operating within the domain.
For now, the regulatory landscape surrounding NFTs remains unclear. However, US entities and artists may soon be required to formally register with the SEC to avoid significant fines. Should other countries choose to model their regulations after the U.S. framework, the already beleaguered NFT market could face even more headwinds.
Compounding these challenges, some economic experts predict a macroeconomic downturn. That could lead to a global recession in late 2023 or early 2024. Taking all these indicators into account, the future appears bearish for NFTs.