Why the NFT Frenzy Won’t Drive Up Prices for Bitcoin Just Yet
The white-hot market for non-fungible tokens has become so big, NFTs are even showing up in the headlines of mainstream publications like the New York Times and on cable news programs. But can the craze have much of an effect on bitcoin (BTC, -0.41%)? Probably not, at least for now.
The oldest and largest cryptocurrency, which, at around $57,000, ended a weeklong winning streak Friday, sits at the center of digital-asset markets, accounting for some 62% of the overall industry’s $1.7 trillion market capitalization.
So it would stand to reason there might be some spillover into the bitcoin universe from NFTs, which work atop mainly Ethereum-based blockchain networks, even if the connection might be indirect.
“Although NFTs have a different use case than bitcoin, both are part of the same vision for a decentralized digital future,” said Miha Grčar, head of business development at crypto exchange Kraken. “The success of one complements the other.”
According to the website nonfungible.com, the NFT industry had a market capitalization of $338 million at the end of 2020.
The NFT figure, however, doesn’t include this year’s eye-popping growth, most recently evidenced in Thursday’s $69 million purchase of a digital work by the artist Mike Winkelmann, also known as Beeple. Or the $6.6 million digital token representing an animated clip of a graffiti-covered Donald Trump lying face down in the grass. Or the $1 million batch of 34 “digital collectibles” known as CryptoPunks.
Contrast those figures with bitcoin’s market value of roughly $1 trillion. So at least for now, the NFT “industry” might not be enough to make a big difference in the crypto universe, especially with the MicroStrategys and Teslas on Wall Street buying billions of dollars of bitcoin as an inflation hedge or a bet on future payment technologies.
“The relative sizes of the markets means it’s effectively impossible for NFT spillover to have a material price impact” on bitcoin, Piers Kicks, venture partner at the cryptocurrency analysis firm Delphi Digital, said in a Twitter message to CoinDesk.
Even so, the NFT market is seen as having vast growth potential for a broad range of things: artwork; video game items including skins, weapons and avatars; music; digital trading cards; tokenized real estate, racehorses and designer sneakers; virtual land; and video footage of iconic sporting moments.
Such widespread use could introduce new people into the cryptocurrency ecosystem. That might lead to investing in bitcoin.
“If you want to buy NFTs, you need to be buying crypto,” Joel Kruger, cryptocurrency strategist at LMAX Digital, told CoinDesk. “And if you’re going to start learning about crypto, you are going to be turned onto the value proposition that bitcoin offers.”
NFTs “introduce a whole new world of people to the possibility of new technology, which happens to be around blockchain and cryptocurrency,” Kruger said. “This is the way adoption should happen. There is an opportunity and solution that is better than what exists right now, and people are drawn to that.”
It’s important to note the majority of NFTs transactions are made with ether (ETH, -2.68%), the native cryptocurrency of the Ethereum blockchain and second-biggest overall.
Beeple’s $69 million NFT, for example, was paid for with ether by Metakovan, the pseudonymous founder of non-fungible token (NFT) fund Metapurse.
There are strong linkages between bitcoin and ether because bitcoin’s price usually has a strong impact on ether and other cryptocurrency prices.
As of March 11, the correlation between bitcoin and ether remains strong at 0.70, despite a drop from earlier last year, according to data compiled by CoinDesk.
It’s also possible to convert bitcoin into a tokenized form such as wrapped bitcoin (wBTC) so that it can be transferred over the Ethereum blockchain.
“If you want to buy NFTs, you need to be buying crypto,” Kruger said. “And if you’re going to start learning about crypto, you are going to be turned onto the value proposition that bitcoin offers.”
In addition, there are indications interest in NFTs be having some kind of effect on the market for ether.
When the volume of NFT buyers and sellers increased dramatically in the fourth quarter of 2020, according to the “Non-Fungible Tokens 2020” report by nonfungible.com, ether’s prices were also moving up quickly to above $1,000 from September’s low around $312. This year, ether has pushed even higher, to an all-time high above $2,000 as recently as last month.