Do cryptocurrency prices affect the value of NFTs? Let us find out – CNBCTV18

The non-fungible token (NFT), a relatively unknown concept until recently, has now become ubiquitous. Spending on the digital asset jumped to nearly $41 billion at the end of 2021--from just $1 billion in 2020--per a report by blockchain specialist Chainalysis. NFTs transform art, music, and even sports, and provide creators the option to monetise their digital artwork.

Last year, the NFT market saw sales at eye-popping levels. A digital photo collage by South Carolina-based graphic designer Mike Winkelmann, known to the art world as Beeple, for example, sold for $69.3 million, making it one of the biggest NFT sales to date.

The value of NFTs depends on various factors--their scarcity, the demand for the artwork or sometimes even the artist, and the prices of the underlying cryptocurrency used. Many online marketplaces that sell NFTs are powered by a blockchain. Currently, the ethereum blockchain powers the most popular ones. So, if you are looking to buy or sell NFTs through one of the popular marketplaces, you will most likely need ethereum's native cryptocurrency, ether, for the transaction.

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But what is interesting is that while cryptocurrencies are extremely volatile, not all NFTs track the movement of their underlying crypto. For instance, despite the ongoing correction in crypto markets, NFT marketplace OpenSea has recorded $2.3 billion in volume in January so far, on pace to break its monthly volume record if the trend continues.

Discussing last weekends crypto selloff with Yahoo! Finance, Mason Nystrom, senior research analyst at crypto analytics firm Messari explained this anomaly. Despite the volatility of the crypto market, the nature of NFTs may make them independent from the crypto markets, Nystrom said.

"NFTs are a significantly broad category that can include music, art, collectibles, gaming assets, fantasy sports, financial assets, and more. As such, it's possible that NFT commerce in one specific vertical grows while others decline or fluctuate over time," he added. "Going forward it's possible that we'll see a greater decoupling of the crypto markets whereby one asset like art NFTs might perform well amidst the overall crypto market performing poorly or vice versa."

A collector who goes by the pseudonym 'Pranksy' had another theory. "The people who spent many thousands on NFTs aren't going to sell them for 50% off tomorrow, at least not many are. Much like traditional art markets bucking Wall Street trends, I believe many see certain NFTs as a store of value, he told Reuters in May last year after his cryptocurrency portfolio's worth dropped by more than $10 million at some point on one day.

Collectors believe artwork, virtual land and other digital assets represented by NFTs hold value that is distinct from the cryptocurrencies used to buy them.

A study by sciencedirect.com titled 'Is non-fungible token pricing driven by cryptocurrencies?' suggests there is a low spillover between cryptocurrencies and NFTs.

The study used the dataset of the two largest cryptocurrency markets, Bitcoin and Ether, with the raw data obtained from coinmarketcap.com and the NFT data taken from secondary markets trades: Decentraland LAND tokens, CryptoPunk images, and Axie Infinity game characters, and Individual trade data sourced from nonfungible.com.

The results from the study show that when it comes to volatility in the cryptocurrency market, the spillover effect to NFT markets is lower, suggesting the NFT and the cryptocurrency market are distinct from each other and do not necessarily affect each other in a meaningful way.

NonFungible.com co-founder Gauthier Zuppinger told Reuters in May that the NFT market was increasingly de-correlated with the crypto market. Crypto-rich investors could even see NFTs as less risky than cryptocurrencies "because they are backed by the use-case," Zuppinger pointed out.

(Edited by : Vijay Anand)

First Published:Jan 14, 2022, 04:06 PM IST

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Do cryptocurrency prices affect the value of NFTs? Let us find out - CNBCTV18