A generalization that is often made is the similarity of price action between NFTs and Cryptocurrencies. It
is slightly more intricate than people may think. With an economic recession up in the air for 2023 from
economists, differentiating the two markets can help give people insight and confidence in their
investment decisions.
Differences
A key difference is the trading volume. In 2021 Crypto trading volume was over $14 trillion whilst NFTs in
their breakthrough year only accumulated around $25 billion. This shows the massive difference in
liquidity. However, this does not directly correlate to the volatility of the NFTs. This is due to the supply of
NFTs as well as the basis for their demand for them.
NFTs’ value is created by the demand for the good in the same way as art, collectables and similar,
because of the digital ownership status that users receive when purchasing them. This is different to
Crypto where the main reason for investors buying is the belief that Cryptocurrency will be superior to
current FIAT currencies and so the money will flow to their investment and make a profit that way.
In addition, the NFT market is much more secluded with most projects only allowing seats of around
10,000 in the biggest collections. People cannot own part of an NFT pushing out smaller retail investors
to Crypto where they can own a portion of a coin. This makes it so that a lot of the money stays
circulating the same money so less money leaks out of the space and makes new money entering
harder unless there is great demand. Also means there is less trading volume. We can see how this
plays on the price of NFTs where their ETH value stays stable even though the FIAT value may fluctuate
a lot. Holders are holding for the long-term and see the NFT at ETH value instead of following the FIAT
value.
Performance
There has been speculation that Cryptocurrencies will be a good hedge against the damage a recession
causes to purchasing power as well as other assets’ values. However, at the current state, where Crypto
is still mainly being used as a store of value, it may not be an effective hedge. The biggest value it brings
is transacting money without barriers of banking and government which is only being done on a small
scale i.e. citizens of corrupt governments and war/crisis relief. Until it can bring more utilization than a
store of value which is where big money is currently sitting, then we can expect prices to reflect the other
markets, if not more dramatically with the lower liquidity.
As for NFTs, the ETH/Crypto value of NFTs is likely to remain relatively stable whilst the FIAT value will
likely be volatile following the Crypto prices. Due to the big projects being owned and traded by a
secluded group of enthusiasts that tend to have a more long-term approach to their NFT purchases,
unnerved by the FIAT value and more concerned with the Crypto value.
