Do Crypto Prices Affect NFTs?

Apr 12, 2022
3 min read

Non-Fungible Tokens (NFTs) is a concept that was not known until recently and is now widely used. Consumer spending on digital assets has increased from $1 billion in 2020 to nearly $41 billion at the end of 2021, according to blockchain chainalysis experts. NFTs have transformed art, music, and sports and offer creators the option to monetize their digital artwork.

Last year, the NFT marketplace saw eye-popping levels of sales. For example, South Carolina-based digital photography collage by designer Mike Winkelmann was sold for $69.3 million, making it one of the largest NFT auctions.

What is NFT?

NFTs are digital assets that represent real-world objects such as art, music, game content, and videos. They're frequently bought and sold with cryptocurrencies and encrypted with the same basic software as other cryptocurrencies.

Despite the fact that NFTs have been around since 2014, they are gaining appeal as a popular way to trade digital art pieces recently. Since November 2017, $174 million has been spent on NFTs.

How Are NFTs Different From Cryptocurrencies?

NFT stands for non-fungible token. It is typically built using the same type of programs as cryptocurrencies, such as Bitcoin or Ethereum, but the similarities end there.

Cryptocurrencies and physical money are "fungible," meaning they can be traded or exchanged. They're also the same value - one dollar is always the same as another; one bitcoin is always equal to another bitcoin. Crypto's fungibility makes it a reliable way to conduct blockchain transactions.

NFTs are different. Each one contains a digital signature, making it hard to convert or compare NFTs. For example, an NBA Top Shot clip is not suitable for every day because they are all NFTs. (For that matter, one NBA Top Shot clip doesn't even fit into another NBA Top Shot clip.)

Do Crypto Prices Affect NFTs?

The value of NFTs depends on a variety of factors - their scarcity, the demand for artwork or even artists, and the price of the underlying cryptocurrency spent. Many online marketplaces for selling NFTs are powered by blockchain. Currently, the Ethereum blockchain provides the most popular power. So, if you're looking to sell or purchase NFTs on one of the most popular exchanges, you probably need ether, Ethereum's native cryptocurrency, to do the job.

But the good news is that despite the volatility of cryptocurrencies, not all NFTs are tracking their underlying crypto movements. For example, despite the ongoing correction in the crypto market, the NFT OpenSea market area has seen $2.3 billion in volume so far in January, the fastest monthly volume on record.

Discussing the recent cryptocurrency sell-off with Yahoo! Mason Nystrom, a senior analyst at financial analysis firm Messari, described this anomaly. Nystrom said that despite the volatility in the crypto market, the NFT environment might make them independent of the crypto market.

"NFTs are an extensive category that can include music, art, collectables, game assets, dream games, financial assets, etc. He added, "going forward; we are likely to see a major fragmentation in the crypto market, where one asset (like NFT technology) may work well across the crypto market performing poorly and vice versa."

A study published on ScienceDirect, "Do cryptocurrencies drive the pricing of non-fungible tokens?" suggests a downward spiral between cryptocurrencies and NFTs. The study used data from two major cryptocurrency markets, Bitcoin and Ethereum, with original data from coinmarkcc.com and NFT data from secondary markets: Decentraland LAND tokens, CryptoPunk game character images and Axie Infinity, and individual commercial data from Nonfungible.com

The data indicate that when it comes to cryptocurrency market volatility, the knock-on effect on the NFT market is weaker, suggesting that NFTs and cryptocurrency markets are different from each other and don't really affect each other in any meaningful way.