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There is no doubt that cryptocurrencies and NFTs are closely linked together. In fact, it is fair to say that without cryptocurrency, there would be no NFTs. But the question remains: Does crypto’s price affect the NFT market? This post will first explain briefly what NFTs and cryptocurrencies are and then detail how they are linked together. Finally, you will learn that although they are closely related, they are two different markets driven by different things.
What Are NFTs?
NFT stands for “non-fungible token” and is a new form of digital assets that are scarce, non-fungible, and tradeable. They can be anything from games to artwork and have become the unique asset of choice for many people, from investors to celebrities. NFTs have many advantages over other digital assets because they are limited in number and cannot be copied or altered by anyone else. This makes them more valuable than any other type of digital asset because they cannot be reproduced or manipulated in any way. Additionally, they are beneficial to artists who want to retain copyright on their works but allow others to enjoy them.
They have come under scrutiny in many ways recently, in part due to misinformation and general ignorance about what they really are. You can think of them like having a signed print of an artwork by a famous artist who has only signed a certain amount of copies. Although the printed image in itself isn’t valuable, the added value comes from the signature and scarcity. However, this is a simplistic definition, and with new exciting projects like the Metaverse approaching, there will be more significant opportunities to buy and use NFTs.
What Are Cryptocurrencies?
A cryptocurrency is a digital currency in which units are generated, and funds are transferred using an encryption algorithm. They use a technology called a blockchain which is a decentralized, public ledger of all cryptocurrency transactions. The way that they differ from NFTs is that cryptocurrencies are fungible by their nature. In other words, each token is the same, and one Bitcoin will always be equal in value to another. NFTs, on the other hand, are non-fungible, meaning that each one is an entity unto itself. Many of the major crypto tokens use their own blockchain, and this is where the connection between crypto and NFTs begins to make sense.
What Is The Relationship Between Cryptocurrencies And NTFS?
Although these assets share some similarities, they are somewhat different. However, they both use blockchain technology to work. If you need an analogy, you can think about a bank as the blockchain, crypto as cash, and the NFT as a piece of art. You can store the money and the artwork in the bank, and a bank can facilitate trading (sort of), and the cash and the art have value. However, art is fundamentally different from money, even if both have an intrinsic value.
In order to purchase and trade cryptocurrency or NFTs, you will need to sign up to a special marketplace, also known as an exchange. Although many of the most well-known crypto exchanges are starting to list NFTs, you are more likely to find them on their own dedicated marketplace. According to jungle, an NFT market is “a place where creators and collectors can meet each other,” making them different from crypto exchanges, which exist solely to facilitate trading. Additionally, as previously mentioned, NFTs and cryptocurrencies are similar because they both use blockchain technology. In fact, most NFTs use the Ethereum blockchain and, as such, are principally traded for ETH. Although other blockchains are increasing in popularity, NFTs have stuck with ETH by and large. So, now that you have a basic understanding, it is time to move on to the main question…
Does Cryptocurrency Influence NFT Pricing?
This is an especially pertinent question seeing as the market for cryptocurrencies has bottomed out since the Fed announced plans to increase interest rates, spooking most investors from riskier assets. While that news is by the by, it is interesting to note what has happened with the NFT market in the same time period. You might think that you will see a similar downturn in sales. However, even if you did, that is correlation rather than causation. In reality, the market for NFTs is only really influenced by the price of the tokens used to trade them. So if the price of ETh rises, so will the cost of an NFT and so on. However, NFT pricing is also influenced in several other ways.
What Factors Influence NFT Pricing?
Valuing an NFT can be as tricky as valuing anything that exists ethereally. Nonetheless, the price of NFTs is subject to many factors, with the most prominent being:
- Rarity
- Utility
- Tangibility
Rarity
Rareness translates directly into how hard it is to acquire a particular NFT. Some examples of rarity include first-of-a-kind creations by famous creators, such as digital artworks, or NFTs created by celebrities, such as the artwork by Beeple, which happened to be the most expensive ever sold. Essentially, it is a matter of supply and demand plus the creator plus if it is desirable or not.
Utility
Whether physical or digital, the utility of an NFT lies in its application in real life. Some NFTs allow players to use them in games, such as virtual lands, skins, or characters, instead of just being collectibles. Due to this characteristic of NFTs, they can deliver immediate value that accrues over time as the underlying project grows in popularity. Like anything collectible, they are worth what someone perceives their value.
Tangibility
By combining tangibility and immutability, NFTs offer a unique value proposition. An NFT can provide ownership rights to anything, but that doesn’t make the item exceptional or highly in demand. Practicality, scarcity, and user satisfaction will determine the underlying value of such an object. Nevertheless, the more tangible an NFT is, the higher its cost can be. For example, if an NFT gave exclusive access to something real, it could be more expensive if the entrance is worth it.
While NFTs and cryptocurrencies are closely linked, they remain separate for the most part. NFT pricing is somewhat influenced by cryptocurrency, but only in the sense that crypto is used to buy them. Outside of that, other factors affect their price.
