The main cryptocurrencies are Prices are currently continuing to drop from already low levels. It’s a sale, although not big enough to shake the confidence of crypto-believers. However, the impact of the cryptocurrency decline on crypto-denominated assets should be interesting.
The NFT market, which is largely built on the Ethereum blockchain, has seen a rapid rise in value and trading volumes as the value of Ether, the original token of its chain, skyrocketed. What will happen to NFTs in a market where Ether is declining? Let’s talk about it.
How much to sell?
In the past week, bitcoin is down 8.6%, ether is down 7.8%, and Solana token is only about 12% per CoinMarketCap data. These are sharp drops, even for the most volatile crypto market. Of the recent highs, the declines have been more steep. From the highs set during the fourth quarter of 2021, bitcoin is down about 35%, ether is down by about 28%, and the Solana token is down about 40%.
What’s going on? The Wall Street Journal has a very brief explanation today:
Cryptocurrencies led by bitcoin and ether slipped as part of a broader tech sell-off, cementing their position among investors as risky assets quickly got dumped in moments of market stress.
The declines came due to the Federal Reserve’s meeting minutes, which showed officials are looking at a faster schedule for raising interest rates this year. As interest rates rise, holding volatile investments that produce little income becomes less attractive compared to government bonds.
Simply put: As prices rise, less risky assets become more attractive in terms of return; This makes the higher-risk assets less attractive and therefore less valuable. A decrease in the value of high-growth software inventory It is likely to be driven by similar dynamics in the crypto market. Bitcoin is not an uncorrelated asset, it seems obvious at this point.
But what does all this mean for NFTs? Few things.
Prices, trading and correlations
The boom in NFT value and trading activity is not a single driving factor. Instead, there have been countless contributions, from celebrity involvement to improving technology, improving public awareness and more.
I would argue that it is also about the sharp appreciation of ether in the past year or so. In the middle of 2020, Ethereum tokens can be purchased for less than $250 each. Ether tripled in value by the end of the year and reached the $4,700 mark last year. This massive appreciation led to the creation of a huge amount of paper – tokens? – Wealth. In short, the people holding the ether enjoyed huge returns, very quickly.
More than anything else, the wealth generated by the appreciation of ether has led to the NFT boom, in my view. After all, I don’t think people transferred millions of dollars to me ether to buy digital signatures on the blockchain related to certain images; Instead, I think we’re seeing ethereal wealthy people gambling what they should feel like home money on unconventional assets. Not that this is a bad thing; It’s neutral, I think. But it does raise the question of what happens to both NFT activity and NFT prices when a supporting asset, if we can call it ether, quickly loses its value.