Crossover between NFT and Cryptocurrency Pricing

Dec 22, 2021
7 min read

Digital transactions involving internet banking and unified payment interfaces are prevalent. As financial technology advances, the next significant transition is expected in the instrument itself, with currency switching from physical to virtual mode.

Despite price volatility, concerns about their carbon imprint, and ever-increasing regulatory obstacles, virtual currencies or cryptocurrencies - bitcoin and ethereum are prime examples - gaining traction.

Cryptocurrency is digital money, decentralized (peer to peer), and built on open-source software. An open-source software platform enables the establishment of a private currency and the payment of that virtual currency by users.

The Market of NFT:

In early 2021, non-fungible token (NFT) markets grew in popularity. Any digital material can be used as an NFT. The most general categories are collectibles, artworks, virtual world objects, and digitalized characters from sports. An NFT begins registering a digital asset's ownership on a blockchain, commonly on the Ethereum network. After that, the digital asset can be sold with ownership changes, and the bitcoin payment received is recorded on the blockchain.

While NFTs are exchanged using cryptocurrencies, they have several distinct characteristics that are important to keep in mind when trying to comprehend them. Even if they have some asset-like features, cryptocurrency is primarily meant as a currency. NFTs, on the other hand, are designed to be used solely as assets. The term "non-fungible" in the NFT name is a good indicator of this distinction. One of the fundamental properties of cryptocurrencies and money, in general, is fungibility, or interchangeability (one bitcoin is the same as another bitcoin, and one dollar the same as another). Therefore, the non-fungibility of NFTs is one of the most valuable asset qualities.

Everyone who follows the NFT market knows the significant overlap between cryptocurrencies and NFT market participants. This is partly because purchasing an NFT necessitates the usage of cryptocurrencies, which is difficult for many people. With this in mind, we researched whether there are any crossover effects between cryptocurrency and NFT pricing in our research. First, let's dive into the reports.

We expect cryptocurrencies to impact NFT pricing because larger markets tend to spill over into smaller related markets, and cryptocurrencies are a much larger connected market than NFTs. On the other hand, NFT pricing may impact cryptocurrency markets, as NFTs and their popularity demonstrate a strong commercial case for blockchain technology. As a result, this addresses an open business question about the blockchains and the cryptocurrencies built on top of their practical applications.

NFT's on the table

There can be one official owner for NFT at any time, and when you buy one, it becomes your legal possession. In addition, because the records are preserved in blockchain, which provides a public record that is 'unhackable' and helps against misappropriation, it is more secure than a regular digital transaction.

To make, or technically 'mint,' an NFT, you'll need a digital wallet compatible with the marketplace you want to use. Then you'll need to upload a file to 'tokenize.' Tokens of this type are created using the same programming as cryptocurrency, and their generation may require payment of platform fees. In addition, a 'transaction fee' may also be charged when a buyer purchases an NFT.

Wazir-X, India's largest cryptocurrency exchange, just established the country's first marketplace for NFTs, built on a blockchain technology developed by WazirX's parent firm Binance, one of the world's largest cryptocurrency exchanges. WazirX charges authors a 5% service fee on the revenues of each sale, and the platform showcases exclusive artwork from painters, photographers, and media professionals from India and other South Asian countries. However, several other businesses lurk in the shadows, waiting for more regulatory clarity before entering the NFT field.

NFT's Play with IP:

NFTs can foster the development of a new generation of artists, musicians, writers, and digital content providers. Artists can list and sell their work directly on marketplaces, without the need for agents, just as e-commerce sites like Amazon have enabled manufacturers to sell their goods directly to customers and modified, if not eliminated, the traditional roles of intermediaries. Likewise, using the medium of NFTs, artists can list and sell their work directly on marketplaces, without the need for agents - especially given how easy it is to build a community of fans on social media platforms!

Consider the following scenario. On an appropriate platform, a writer creates NFTs, each of which is linked to a digital copy of her book. Every buyer of an NFT receives a copy of the title and pays for it with a direct bank transfer to the author's digital wallet.

If an owner wishes to resell an NFT after purchasing it (imagine secondhand bookstores, but online), a smart contract might ensure that the author receives a percentage of resales royalties. The traditional publishing business stands to gain as well. Many parties gain a percentage of each sale in the case of a paper book; with NFTs and smart contracts, contractual pay-outs can be embedded into a transaction, resulting in automated and rapid pay-outs to all parties.

Significantly, the assets in question in the previous scenario are books, but the NFT buyers only receive titles to one copy of each book. The author/publisher retains the underlying copyright in work. In practice, the sale of NFTs frequently includes intelligent contracts and text-based terms and conditions that specify the exact intellectual property (IP) rights that are being transferred. However, if you're planning to purchase Beeple's 'Everyday,' double-check that the terms of sale include a transfer of full copyright in the image to you!

Crossover of Cryptocurrency and NFT:

The ambiguity around such assets is exacerbated because cryptocurrencies and NFTs are not regulated in India, even though they are not prohibited.

However, cryptocurrencies provide an alternative private currency. Nevertheless, the RBI or Reserve Bank of India has maintained a cautious stance toward such assets over the past decade, citing worries about price volatility and fraud.

It published a press release in 2013 warning consumers of the financial, operational, legal, and security dangers connected with bitcoin transactions. In addition, the government indicated that it does not consider cryptocurrencies to be "legal tender or coins" and that it will take all necessary steps to avoid the potential of crypto-assets being used to finance illegal activities.

Let's examine the internal relationships between NFT markets and cryptocurrencies using this concept of trader crossover between couple of market sets. Moratis (2021) reveals that cryptocurrencies have a high level of volatility shock transmission, with Bitcoin dominating this transmission. We study whether cryptocurrency volatility spills over to NFT markets, since there has been trading crossover between cryptocurrencies and NFTs and the potential influence of bitcoin pricing on NFTs.

We will also look into any movement between cryptocurrency and NFT, as the movement has been proved to be a significant element of cryptocurrency markets. Researchers and practitioners alike would benefit from identifying links among the couple of market sets since we could then look at trends in bitcoin pricing to predict likely trends in NFT markets.

The research adds to the limited literature on NFT pricing. The pricing trends of NFTs have only been studied once before. That study reveals that pricing does not show essential efficiency indicators in one NFT market, but some are developing signs of price behavior modifications.

Let' study the primary relationship between NFT pricing and cryptocurrency market pricing. We discover modest volatility transmission and considerable evidence of co-movement, providing a framework for predicting how NFT pricing will evolve as markets mature. In addition, the research leads to a better understanding of how pricing behavior evolves in new marketplaces at a more general level.

Will Cryptocurrency Crash Impact NFT:

NFT is a cryptocurrency; hence, the current cryptocurrency market downturn will be impacted. On the other hand, many cryptocurrency specialists are unsure how NFTs will be affected. According to Edward Moya, a senior market analyst at OANDA, the long-term outlook for cryptocurrencies remains positive. He further notes that many people are still interested in NFTs since they provide exclusive access to vintage artwork. Moreover, NFTs are still expanding in popularity as more composers of various musical and other works enter the market.

Many internet galleries are unlawfully making NFTs of artists' works and auctioning them for large sums. As a result, artists want a piece of this new trend.

Finally, a decrease in NFTs is expected. However, with a bullish trend in cryptocurrencies projected, NFTs will grow exponentially.

How to purchase/sell NFT's?

NFTs are typically stored on public blockchains such as Ethereum, Flow, Algorand, Binance Smart Chain, and similar platforms. Users can construct them utilizing third-party NFT markets like OpenSea, Raible, or Nifty Gateway, or developers can use developer tools. Using these marketplaces is a more straightforward way to create and sell NFTs for the average consumer, and it resembles placing a product on a popular e-commerce platform.

NFTs are typically bought and traded with cryptocurrencies like Ether. In addition, some systems, such as Nifty Gateway, also allow for credit and debit card purchases. However, to enable the transfer of an NFT, those platforms must also carry out crypto-asset transactions on a blockchain in the backend.

USP of NFT:

NFTs, strive to be authentic and unique, which is a significant value proposition. For example, a limited-edition, signed poster by an actor or sportsperson is a fair analog to the traditional world. However, the poster's value lies not in the underlying image alone but in the fact that the celebrity has supported it, although just once or twice. NFTs are also a step ahead since they can be programmed using smart contracts, allowing for the automation of a range of formerly manual processes.

NFTs are simply a digital representation of title to an underlying asset; whether or not an NFT is a security will be determined in large part by whether or not the underlying asset is a security. An NFT representing a corporate share, for example, is likely to constitute security subject to Indian securities law. In contrast, an NFT representing a piece of digital art would serve as a certificate of title.

However, it is essential to note that possessing an NFT representing an asset does not indicate legal ownership of the underlying asset.

Conclusion:

For cryptocurrencies and NFTs, there are no clear regulatory benchmarks. Some nations, including Japan, Australia, Russia, and Switzerland, have created regulations for cryptocurrencies, while others, such as China, Thailand, Indonesia, Saudi Arabia, and Taiwan, have outright outlawed them.

In a recent joint statement, securities, banking, insurance, and pension regulators warned the public about the high dangers connected with virtual currencies and their unsuitability as investment, savings, or retirement planning products.

Given India's expertise in computing technologies and the fact that the crypto business is at the forefront of technical innovation, being a crypto innovation hub might benefit the country substantially. Furthermore, by creating appropriate compliance standards, an ideal regulatory framework would accelerate innovation while reducing the hazards posed by bitcoin.

The tax treatment of NFTs should, in most cases, be determined by the type of the underlying asset. A digital art NFT, for example, could be regarded as an intangible asset or suitable for income tax and the Goods and Services Tax (GST). Therefore, as soon as possible, taxes should be declared and paid.

However, new tax difficulties are likely to arise because of the cross-border and digital character of NFT transactions. The question is whether NFTs are cryptocurrencies or virtual currencies, and if so, how would any future legislation restricting or forbidding crypto-asset transactions affect them? NFTs may be included in a broad definition of cryptocurrencies or virtual currencies, but a more detailed definition should ideally omit them because they are non-fungible.

Interest in cryptocurrencies and related assets like NFTs grows despite the hazards and regulations. As a result, NFTs have emerged as one of the most popular crypto trends in 2021.