Cryptocurrencies and non-fungible tokens (NFTs) share a deep connection. In their early stages, the NFT market operated as a subordinate within the larger cryptocurrency domain, and its limited scale made it highly susceptible to the fluctuations and trends of the cryptocurrency market.
Over time, the NFT landscape has undergone significant transformation. What was once a fledgling market confined to a niche rapidly expanded into mainstream consciousness in 2021, driven in part by endorsements from celebrities. Collections like the Bored Ape Yacht Club infiltrated popular culture, becoming symbols of status and prestige. This evolution has led to a more intricate relationship between NFTs and cryptocurrencies, supporting the argument put forth by NFT industry proponents that NFTs constitute a unique and self-sustaining market entity.
Advocates assert that the intricate connection between digital assets like NFTs and traditional cryptocurrencies underscores the necessity for a comprehensive understanding and analysis of the distinctive characteristics and use cases of each sector.
Daisaku Harada, the chief of NFT marketplace Unikura, remarked, “While cryptocurrencies are closely tied to other financial instruments such as stocks and bonds, NFTs are believed to possess an artistic and community dimension that sets them apart.”
Recently, NFTs have exhibited a noticeable decoupling from the broader cryptocurrency landscape. The downward movement in NFT prices this year occurred later than the downturn in the cryptocurrency market, a phenomenon known as the “lag effect,” signifying a delayed response of the NFT market to cryptocurrency movements.
Title: “Understanding the Lag Effect”
As per data provided by CoinGecko, the cryptocurrency market’s total capitalization reached a peak exceeding US$3 trillion in November 2021.
Interestingly, it wasn’t until January 2022, when the overall cryptocurrency market capitalization had already declined to US$1.65 trillion, that the NFT market reached its zenith. The Forkast 500 NFT Index, a metric measuring NFT market performance, recorded this peak on January 19, 2022.
This inconsistency in price behavior isn’t confined to peaks alone; it also extends to market lows. The cryptocurrency industry experienced its lowest point in recent years in December 2022, following the collapse of the FTX cryptocurrency exchange, ushering in the ongoing extended bear market. In contrast, the NFT sector is presently discovering its bottom, with the Forkast 500 NFT Index falling below 2,000 on September 24, marking the first instance of such a drop since data recording commenced in January 2022.
Carlos Prada, the CEO of blockchain accelerator Masterblox, suggests that the market is likely to continue its decline as the earlier surge in NFT demand was largely driven by traditional retail liquidity. He notes, “A noticeable shift has been observed as these investors, equipped with a deeper understanding of the digital asset space, adjust their strategies, often distancing themselves from short-lived market enthusiasm. This shift is evident not only in the NFT realm but also in emerging sectors like the metaverse and play-to-earn ecosystems.” Prada adds, “As we shift our attention to capital inflow, particularly from the venture capital side, the current landscape presents a rather subdued outlook. The flow of capital into NFT-focused enterprises, including those supporting the infrastructure, appears to be minimal.”
Could the worst still be ahead of us?
The NFT sector, still relatively young, poses a challenging landscape to forecast. Furthermore, the scarcity of historical data makes it difficult to establish concrete insights.
Despite prominent players in industries like fashion, sports, and music increasingly embracing NFTs, the market’s deeper declines are causing concern among industry insiders. This unease is amplified by the looming possibility of legal action from the Securities and Exchange Commission (SEC).
In recent enforcement actions, the SEC categorized NFTs as securities in cases involving the Impact Theory NFT initiative and Stoner Cats, potentially ushering in a new era of regulation. This regulatory stance has significant implications for individual creators, corporations, and trading platforms operating in this domain.
Currently, the regulatory landscape surrounding NFTs remains uncertain. However, U.S. entities and artists may soon find it necessary to formally register with the SEC to avoid substantial penalties. If other countries decide to model their regulations after the U.S. framework, the already challenged NFT market may encounter further obstacles.
Compounding these challenges, some economic experts are foreseeing a macroeconomic downturn that could potentially lead to a global recession by late 2023 or early 2024. Considering all these factors, the future appears less optimistic for NFTs.