The cryptocurrency market was severely impacted on "May 19". How about NFTs?

This article was published on ChainDD, author: Song Song.

Last week, the sharp decline in cryptocurrency prices eroded the value of dollar-based NFTs while increasing their buying and selling costs, which may pose a setback to the rapidly developing digital asset market.

NFTs (Non-fungible Tokens) trade digital assets by recording their ownership status on the blockchain. In February and March of this year, the popularity of NFTs surged, with sales reaching hundreds of millions of dollars, partly due to the skyrocketing cryptocurrency prices in 2020.

Currently, most NFT buyers pay using Ethereum or dollars. However, the cryptocurrency market was hit hard last Wednesday, with a total market cap plummeting by $1 trillion, and the prices of Bitcoin and Ethereum both dropping by 30% to 40%.

Image source: CoinMarketCap

NFT prices in the market are usually quoted in Ethereum, and the recent drop in Ethereum's price means that sellers may raise the prices of NFTs to maintain their dollar value.

NFT Value May Be Underestimated

A collector known as "Pranksy" stated that the value of his cryptocurrency portfolio shrank by over $10 million last Wednesday. However, he mentioned that he does not believe the value of his collection of over 100,000 NFTs has decreased because he has not sold them yet.

Pranksy said, "I don't think those who have invested heavily in NFTs would sell them at half price tomorrow; at least most people wouldn't. It's like the traditional art market going against the trends on Wall Street; I believe many people see certain specific NFTs as a store of value."

NFT enthusiasts believe that the value represented by NFTs, such as artworks, virtual land, game equipment, or other digital assets, is entirely different from the cryptocurrencies used to purchase them.

Andrew Steinwold, a cryptocurrency investor from Chicago who also runs an NFT fund, believes that "since all NFTs are priced in Ethereum, there is no doubt that their value will be underestimated."

Rising Gas Fees Become a Challenge

As cryptocurrency prices fell, the NFT market inevitably faced the impact of rising gas fees, which are payments made to crypto miners for executing transactions on the blockchain.

Last Wednesday, due to a surge in demand for buying and selling Ethereum, gas fees skyrocketed, reaching as high as around 2000 GWei for fast confirmations. OpenSea's daily trading volume also dropped from $2 million on Tuesday to $1.1 million on Wednesday.

Hamish Barnes, head of growth and community at OpenSea, stated, "It's because the high gas fees make it difficult to sell low-priced items." On the Ethereum blockchain, sending low-value NFTs is almost meaningless because the gas fee itself exceeds the value of the NFT.

According to data from NonFungible.com, a website tracking NFT market activity, the sales volume of NFTs on the Ethereum blockchain last Wednesday was $19,687,241, up from $15,637,693 the previous day. However, the number of sales decreased, with only 2,462 sold on Wednesday compared to 4,113 on Tuesday, indicating that part of the costs existed in the form of gas fees.

However, Gauthier Zuppinger, co-founder of NonFungible.com, stated that the correlation between the NFT market and the cryptocurrency market is decreasing.

Zuppinger said, "I don't think the turbulence in the crypto market will have a direct impact on the NFT space in the short term." He added, "Some wealthy cryptocurrency investors might even consider the risks of NFTs to be lower than those of cryptocurrencies because the former have use cases to support them."

Gemini's NFT platform Nifty Gateway reported that there were no significant changes in activity on the platform during the cryptocurrency fluctuations. A spokesperson for the platform stated, "Our collectors usually 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 cryptocurrency market crash, even with token prices dropping by 30% to 50%, the average number of NFTs bought and sold by users still reached 85,787, with a total daily value of $58 million, a 277% increase compared to January.

In January, there were an average of 21,815 NFT transactions daily on Ethereum, Flow, and Wax, while the average transaction number has increased to 82,373 so far in May. During the cryptocurrency market crash, this number was even higher, with an average of 93,809 NFTs exchanged daily. This indicates that the NFT market is resilient to declines in cryptocurrency prices.

From May 12 to May 23, the prices of almost all cryptocurrencies in the market were on a strong downward trend. However, during this period, decentralized applications on the blockchain demonstrated strong utility. Even though centralized entities like Coinbase could not handle network congestion and consumer panic, NFT markets and exchanges like Uniswap continued to operate as usual.

NFT Market Activity Never Stopped

The NFT trading platform Atomic Market is a good example. Despite the continuous decline in the price of its platform token WAXP, trading on the platform continued. Additionally, platforms on the Ethereum blockchain, such as OpenSea and Rarible, experienced a temporary decline in trading volume due to rising gas fees. When gas fees returned to normal, trading activity on the platforms increased again as collectors sought discounted NFTs.

Image source: DappRadar

Moreover, companies allied with NFT projects, such as MANA, AXS, and WAX, suffered significant blows during the recent cryptocurrency market crash. However, looking back, the prices of these tokens have still increased by 300% to 800% since January.

Image source: DappRadar

Of course, the drop in cryptocurrency prices this month has also had some impact on NFT trading volume. Since the cryptocurrency prices began to crash on May 12, the average trading volume of NFTs has been about $5.8 million per day. In the first 11 days of this month, the average daily trading volume of NFTs was $14.9 million. Although NFT trading volume has decreased by 61%, trading activity has not been affected. Collectors, traders, gamers, and artists have continued to trade NFTs as if the cryptocurrency price crash had never happened.

The cryptocurrency price crash this month is significantly different from the crash that occurred in early 2018. The biggest difference lies in utility.

Now, the market has a far greater need for products that require the use of cryptocurrency tokens than it did three years ago. Take trading and lending in the DeFi space as an example, along with many NFT projects, virtual worlds, and blockchain-driven video games, where these tokens and values are locked in liquidity pools and NFTs. There are also projects that integrate financial service elements into gaming experiences, such as Aavegotchi and Alien Worlds.

Of course, trading is not the only way to measure the success of token economies. As blockchain solutions continue to evolve, more products will bring utility to the market. Some may argue that utility makes cryptocurrencies more resilient to market fluctuations. This does not mean that there will be no price fluctuations in the future, but even if values change, market activity will continue.