Thu. Jan 20th, 2022

Major cryptocurrencies are: currently ongoing price declines from already low levels. It’s a sell-off, though probably not one big enough to shake the confidence of the crypto believers. Still, the impact of falling crypto prices on crypto-priced assets should be interesting.

The NFT market, built largely on the Ethereum blockchain, has seen a rapid rise in value and trading volumes as the value of ether, its chain’s original token, has been greatly appreciated. What happens to NFTs in a market where ether is falling? Let’s talk about it.

How many sales?

Over the past week, bitcoin has fallen by 8.6%, ether by 7.8% and Solana’s token by only about 12%, according to CoinMarketCap data. Those are sharp declines, even for the more volatile crypto market. From recent highs, the declines are even steeper. From the all-time highs reached during the fourth quarter of 2021, bitcoin is down about 35%, ether 28% and Solana’s token about 40%.

What is going on? The Wall Street Journal has a pretty succinct explanation today:

Cryptocurrencies led by bitcoin and ether slumped as part of the wider technical sell-off, bolstering their status among investors as risky assets were quickly dumped in moments of market stress.

The declines were driven by the Federal Reserve’s minutes, which revealed that officials are eyeing a faster timetable for raising interest rates this year. As interest rates rise, holding volatile, low-income investments becomes less attractive compared to government bonds.

Simple: as interest rates rise, less risky assets are more attractive in terms of returns; this makes riskier assets less attractive and therefore less valuable. Decline in the value of high-growth software stocks are likely driven by similar dynamics in the crypto market. Bitcoin is not an uncorrelated asset, it seems clear at this point.

But what does all that mean for NFTs? A couple of things.

Prices, trading and correlations

The boom in NFT value and trading activity has no driving factor whatsoever. Instead, countless inputs have come into play, from celebrity involvement to improving technology, better public awareness, and more.

Also involved, I’d say, was the sharp valuation of ether over the past year or so. By mid-2020, Ethereum’s token could be purchased for less than $250 each. Ether value tripled by the end of the year, reaching $4,700 last year. That huge appreciation led to the creation of a simply huge amount of paper – token? – wealth. Basically, people who held ether enjoyed huge returns very quickly.

Above all, the wealth created by the valuation of ether, from my perspective, led to the NFT boom. After all, I don’t think people have transferred millions of dollars go inside ether to buy digital signatures on the blockchain related to certain images; instead, I think we’re seeing ether-rich people gambling with what should feel like house money on non-traditional assets. Not that that’s a bad thing; it’s neutral I guess. But it does raise the question of what happens to both NFT activity and NFT prices when their backing asset, if we can call it ether, loses value rapidly.

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