The value held by artworks, virtual lands, gaming gear or other digital assets represented by NFT is very different from the cryptocurrency used to purchase them, and the NFT market is becoming less relevant to the crypto market.
Last week’s plunge in cryptocurrency prices eroded the value of dollar-based NFTs while raising the cost of buying and selling them, perhaps posing a setback to the rapidly growing digital asset market.
NFTs (Non-fungible Tokens) trade digital assets by recording the status of their ownership on the blockchain. The popularity of NFTs skyrocketed to hundreds of millions of dollars in sales back in February and March of this year, part of which stemmed from the spike in cryptocurrency prices in 2020.
Currently, NFT buyers mostly pay via ethereum or U.S. dollars. However, the cryptocurrency market was hit hard last Wednesday, with total market capitalization plummeting by $1 trillion, including a 30 to 40 percent drop in the price of both bitcoin and ethereum.
Image credit: CoinMarketCap
The price of NFT is usually denominated in Ether in the market, and this drop in the price of Ether means that sellers are likely to raise the price of NFT to keep its dollar value intact.
NFT may be undervalued
A collector who goes by the name “Pranksy” said the value of his cryptocurrency portfolio shrank by more than $10 million at one point last Wednesday. But he said he doesn’t think the value of his collection of more than 100,000 NFTs has also decreased because he hasn’t sold them yet.
I don’t think people who have invested a lot of money in NFTs are likely to sell them tomorrow at a 50 percent discount, at least not most of them,” Pranksy said. It’s as if the traditional art market is going against the Wall Street trend, and I’m sure there are a lot of people who see certain specific NFTs as a means of storing value.”
NFT enthusiasts believe that the value held in works of art, virtual land, gaming gear or other digital assets represented by NFTs is very different from the cryptocurrency used to purchase them.
Andrew Steinwold is a cryptocurrency investor from Chicago who also runs an NFT fund. In his opinion, “because all NFTs are priced in Ether, there is no doubt that they will be undervalued.”
Gas fee spikes become a problem
As cryptocurrency prices have fallen, the NFT market has inevitably also taken a hit from gas fees, a fee paid to crypto miners who perform the act of trading on the blockchain.
Last Wednesday, as user demand for buying and selling ethereum surged, gas fees rose and broke new highs, with extreme confirmation gas fees reaching around 2,000 GWei at one point. openSea’s daily trading volume also fell from $2 million on Tuesday to $1.1 million on Wednesday.
Hamish Barnes, OpenSea’s head of growth and community, said, “This is because the high gas fee makes it difficult to sell low-priced items.” On the ethereum blockchain, it makes little sense to send low-value NFTs because the gas fee itself already exceeds the value of that NFT.
Last Wednesday, sales of NFTs on the ethereum blockchain were $19,687,241, up from $15,637,693 the day before, according to NonFungible.com, a website that tracks NFT market activity. Sales were down, however, with only 2,462 sold on Wednesday compared to 4,113 on Tuesday, with some of that fee apparently in the form of gas fees.
However, NonFungible.com co-founder Gauthier Zuppinger said the NFT market is becoming less relevant to the crypto market.
Zuppinger said, “I don’t think the turmoil in the crypto market will have a direct impact on the NFT space in the short term.” He added, “Some wealthy cryptocurrency investors may even see NFT as less risky than cryptocurrencies because the former are backed by examples.”
Nifty Gateway, Gemini’s NFT platform, said there was no significant change in behavior on the platform during the cryptocurrency volatility. A spokesperson for the platform said, “Our collectors typically have an affinity for digital art, so they buy and hold their NFTs.”
NFT Trading Volume Grows During Cryptocurrency Price Decline
In fact, during this month’s crypto market collapse, even as token prices fell 30 to 50 percent, the average number of NFTs purchased and sold by users reached 85,787, with a total daily value of $58 million, a 277 percent increase from January.
In January, there were an average of 21,815 NFT transactions per day on Ether, Flow and Wax, while the average number of transactions has increased to 82,373 so far in May. During the crypto market crash, the number was even higher, with an average of 93,809 NFT exchange wallets per day. This shows that the NFT market is resilient to falling cryptocurrency prices.
From May 12 to May 23, the prices of almost all cryptocurrencies in the market were in a strong downward trend. However, decentralized applications on the blockchain had strong utility during this period. Even though centralized institutions like Coinbase were unable to handle network congestion and consumer panic, NFT marketplaces and exchanges like Uniswap continued business as usual.
NFT’s marketplace activity never stops
The Atomic Market, an NFT trading platform, is a good example. Despite the declining price of its platform token WAXP, trading on the platform continues. In addition, platforms on the ethereum blockchain, such as OpenSea and Rarible, were affected by the rising gas fee and saw a short drop in trading volume. When the gas fee returned to normal, trading activity on the platform increased again as collectors looked for discounted NFTs.
Photo credit: DappRadar
Furthermore, companies that are “aligned” with NFT projects, such as MANA, AXS and WAX, all took a considerable hit during the recent crypto market crash. However, taking a step back, the prices of these tokens have still risen between 300% and 800% since January of this year.
Image credit: DappRadar
Of course, this month’s drop in cryptocurrency prices has also taken a toll on NFT trading volume. Since cryptocurrency prices began to collapse on May 12, NFT’s average trading volume has been about $5.8 million per day. This compares to an average daily trading volume of $14.9 million for NFT in the first 11 days of the month. Despite the 61% drop in NFT trading volume, trading activity has not been affected. Collectors, traders, gamers and artists have been trading and buying and selling NFT as if the cryptocurrency price plunge never happened.
This month’s cryptocurrency price plunge is very different from the one that occurred in early 2018. The biggest difference is practicality.
There are far more products on the market now that require the use of crypto tokens than there were three years ago. Take trading and lending in the DeFi space, for example, and of course the many NFT projects, virtual worlds and blockchain-powered video games where tokens and values are locked into liquidity pools and NFTs. There are also projects that combine elements of financial services into the gaming experience, such as Aavegotchi and Alien Worlds.
Of course, transactions are not the only way to measure the success of the pass-through economy. As blockchain solutions continue to evolve, more products will bring utility to the market. One might argue that utility makes cryptocurrencies more resilient to market fluctuations. This does not mean that there will not be any price fluctuations in the future, but market activity will continue even as values change.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/why-is-nft-trading-volume-increasing-instead-of-decreasing-as-cryptocurrencies-plunge/
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