How will the crypto selloff impact the NFT market?

Major cryptocurrencies are currently enduring price declines from already depressed levels. It’s a selloff, though likely not one large enough to shake the confidence of the crypto faithful. Still, the impact of falling crypto prices on assets priced in crypto should prove interesting.

The NFT market, largely built on the Ethereum blockchain, has seen a rapid ascent in value and trading volumes as the value of ether, the native token of its chain, appreciated massively. What will happen to NFTs in a market in which ether is falling? Let’s talk about it.

How much of a selloff?

In the last week, bitcoin has fallen by 8.6%, ether by 7.8% and Solana’s token by just around 12%, per CoinMarketCap data. Those are sharp declines, even for the more volatile crypto market. From recent highs, the declines are even steeper. From all-time highs set during Q4 2021, bitcoin is off by around 35%, ether 28% and Solana’s token about 40%.

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

Cryptocurrencies led by bitcoin and ether slumped as part of the broader tech selloff, cementing their status among investors as risky assets quickly dumped in moments of market stress.

The falls were triggered by Federal Reserve minutes that showed officials are eyeing a faster timetable for raising interest rates this year. As rates rise, holding volatile investments that produce little income becomes less attractive compared with government bonds.

Simply: As rates rise, less risky assets are more attractive in yield terms; this makes riskier assets less attractive and therefore worth less. Declines 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 of that mean for NFTs? A few things.

Prices, trading and correlations

The boom in NFT value and trading activity does not have a single driving factor. Instead, myriad inputs have been at play, from celebrity involvement to improving technology, better public awareness and more.

Also involved, I would argue, has been the sharp appreciation of ether in the last year or so. In mid-2020, Ethereum’s token could be purchased for less than $250 each. The value of ether tripled by the end of the year and reached the $4,700 mark last year. That enormous appreciation led to the creation of a simply massive amount of paper — token? — wealth. In short, folks holding ether enjoyed huge returns, very quickly.

More than anything else, the wealth created from the appreciation of ether led to the NFT boom, from my perspective. After all, I don’t think that folks have been transferring millions of dollars into ether to buy digital signatures on the blockchain that relate to particular images; instead, I think we’re seeing ether-rich folks gamble with what must feel like house money on non-traditional assets. Not that that is a bad thing; it’s neutral, I reckon. But it does raise the question of what happens to both NFT activity and NFT prices when their backing asset, if we can call ether that, rapidly loses value.