Cryptocurrencies and non-fungible tokens (NFTs) share a deep connection. During their initial stages, the NFT market was essentially a subsidiary of the broader cryptocurrency realm, operating on a smaller scale and significantly influenced by the trends and movements within the cryptocurrency market.
Over time, the NFT landscape has undergone substantial evolution. What once started as a niche market has grown tremendously, capturing mainstream attention in 2021, driven in part by celebrity endorsements. Notable collections like the Bored Ape Yacht Club transcended into popular culture, symbolizing status and prestige. As a result, the relationship between NFTs and cryptocurrencies has become more intricate, bolstering the argument put forth by NFT advocates that NFTs constitute a distinct and self-sustaining market entity.
These advocates argue that the intricate relationship between digital assets such as NFTs and traditional cryptocurrencies underscores the importance of comprehending and analyzing each sector’s unique characteristics and applications.
Daisaku Harada, the chief of the NFT marketplace Unikura, highlighted this distinction: “While cryptocurrencies share similarities with other financial instruments like stocks and bonds, NFTs are believed to have, at least presently, an artistic and community dimension that sets them apart.”
Recent trends show that NFTs have displayed a noticeable decoupling from the broader cryptocurrency landscape. Declines in NFT prices this year occurred later than the downturn in the cryptocurrency market, a phenomenon referred to as the “lag effect.” This phenomenon signifies a delayed reflection of cryptocurrency movements in the NFT market.
The lag effect
According to data provided by CoinGecko, the cryptocurrency market reached its pinnacle with a market capitalization exceeding $3 trillion in November 2021.
However, it was not until January 2022, when the total crypto market capitalization had already dwindled to $1.65 trillion, that the NFT market reached its zenith. The Forkast 500 NFT Index, a measure of NFT market performance, pinpointed the market’s highest point on January 19, 2022.
This erratic price behavior is not confined to peaks alone; it extends to market lows as well.
In December 2022, the cryptocurrency industry experienced its lowest point in recent years following the collapse of the FTX cryptocurrency exchange, ushering in the ongoing prolonged bear market. In contrast, the NFT sector is presently in the process of finding its bottom. On September 24, the Forkast 500 NFT Index dipped below 2,000 for the first time since data recording commenced in January 2022.
Carlos Prada, CEO of the blockchain accelerator Masterblox, anticipates further market declines, attributing the prior surge in NFT demand primarily to traditional retail liquidity. Prada noted, “We have observed a noticeable shift as these investors, armed with a more mature understanding of the digital asset space, adjust their strategies, often distancing themselves from fleeting 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.” He added, “As we shift our attention to capital inflow, particularly from the venture capital side, the current situation presents a rather subdued outlook. The flow of capital into NFT-focused ventures, including those supporting the infrastructure, appears to be minimal.”
Is there more adversity on the horizon?
The NFT sector, still relatively young, presents a challenging landscape to forecast. Furthermore, the scarcity of historical data makes it arduous to draw concrete conclusions.
While prominent players in the fashion, sports, and music industries are increasingly embracing NFTs, the recurring declines in the market raise concerns among industry insiders. This apprehension is exacerbated by the imminent threat of legal actions from the Securities and Exchange Commission (SEC).
In recent regulatory actions, the SEC has categorized NFTs as securities in cases involving the Impact Theory NFT project and Stoner Cats, marking the beginning of a new regulatory era. This stance by the financial oversight authority holds significant implications for individual creators, corporations, and trading platforms operating within this domain.
Presently, the regulatory framework surrounding NFTs remains uncertain. However, entities and artists based in the United States may soon be required to formally register with the SEC to avoid substantial penalties. If other nations choose to adopt a regulatory approach similar to that of the United States, the already beleaguered NFT market could face additional challenges.
To compound these difficulties, some economic analysts are forecasting a broader economic downturn that could potentially lead to a global recession by late 2023 or early 2024. Considering all these factors, the outlook for NFTs appears to be bearish in the near future.