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As decentralized finance is in a downward spiral, crypto’s fall can affect NFT market capitalization.
Though NFTs and cryptocurrencies are related by the underlying technology, they serve different purposes. Non-Fungible-Tokens are part of Crypto culture and are a relatively new concept in the digital art front. As the spending on digital assets has increased to US$41 last year from US$1 billion in 2020, it is obvious that it is considered a trending investment platform. Since crypto fall is foreseeable, no wonder there is speculation that NFTs can sustain their popularity.
NFTs are digital assets that usually represent the digital version of art, music, in-game items, and videos that are traded using blockchain technology. Unlike physical assets, they are non-fungible, i.e., they are unique in their form and are assigned a unique code to differentiate the specimen from its digital copy. Some of the NFTs are so unique that they are sold for startlingly higher prices. For example, the digital photo collage by Mike Winkelmann, a South Carolina-based graphic designer, was sold for a whopping US$69.3 million. Though NFTs are being traded and stored in different blockchain networks, Ethereum is the popular one. NFTs cannot be bought using traditional currency; Cryptocurrency is the only option as NFTs have similar underlying code as cryptocurrencies.
With major cryptocurrencies undergoing bearish trends, NFTs are facing an impending downfall. Or is it just an assumption? Experts have divided opinions on this front. If we closely look at the market, there are NFT marketplaces like OpenSea, which has recorded US$2.3 billion in volume in January alone. On the other hand, traders might have to cough up more money when the transaction fee for digital tokens will be increased despite the crypto fall.
Enormous Popularity of NFTs
Just a couple of years back, nobody knew what an NFT was. But right now, everybody from celebrities to business magnets and even laymen are aware of the term. On the other hand, they have also started investing in NFTs with the hope to reap benefits. Non-fungible tokens have recorded a 38,000% year-over-year increase.
The explosive popularity of NFTs was solely because of the growing dominance of Bitcoin and Ethereum. When people start exploring disruptive concepts like cryptocurrencies, they tend to stretch their arms into non-fungible tokens, Metaverse, and decentralized applications. Similarly, the crypto wind has brought many people into the cryptocurrency market. However, things are very uncertain for digital tokens right now. With a possible ‘crypto winter’ on the radar, there are high chances that the crypto fall might have at least a slight impact on the NFT marketplace.
Can Crypto’s decline trip NFTs environment?
The cryptocurrency market has been enjoying prominence since 2020 when Bitcoin reached a record high and left people in awe. After undergoing multiple record prices and corrections, Bitcoin is currently experiencing a bearish trend. Along with the foremost cryptocurrency, Ethereum and other altcoins are also undergoing a massive sell-off period. The sharp declines and extreme volatility have become a new normal in the cryptocurrency market. Since Federal Reserve announced the plan to increase interest rates, the whole crypto sphere is facing severe hits. However, while some might argue that the crypto fall has nothing to do with NFTs, experts suggest otherwise.
Experts claim that the cryptocurrency price surge was the major reason why non-fungible tokens took shape in 2021. The Ethereum price hike in 2020 and 2021 has made many investors rich, After getting their hands on big money, they started investing in even more uncertain and riskier assets like NFTs to yield profit. However, since the ETH price is also at a massive fall, people buying NFTs in the platform might reduce.
How Transaction Fees can impact Non-Fungible Tokens?
Even when we say that it is not just crypto millionaires who are investing in NFTs, the ‘gas fee’ for digital tokens could also pose a problem to non-fungible tokens’ growth. Gas fees is the payment made to the crypto miners who carry out the transaction on the blockchain. Despite the worsening crypto fall, gas prices spiked as demand to buy and sell ETH increased. This resulted in NFT liquidity drying up as buyers opted for delayed transactions to save up on gas fees.