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Jan 24, 2023

There is No Spoon

Jack Burt
Jack Burt


Recently, the Crypto market has been on an upward tear while most NFT collections remain stagnant or are dropping (both in price and sales).

We figured there’s probably quite a few degens out there who’re wondering just how correlated the NFT and broader crypto markets are.

Of course, NFTs are definitionally connected to blockchains — but we still don't know to what extent and in which direction they are connected in terms of price, volume, sales, participation, etc.

Seeking a more definitive answer, we performed a conclusory speedrun on the limited, intriguing research material that has been published on this topic.

Let’s Dig In

One of the earlier studies on the correlation question came from Michael Dowling at Dublin City University. Dowling’s report, published in the spring of 2021, suggests that NFT markets and crypto markets are bound by some “co-movement”; however, he also found refining evidence that “NFTs can potentially be considered as a low-correlation asset class distinct from cryptocurrencies”.

Jpeg people know this in their gut, right? NFTs are tied to Crypto, but they don’t move in lock-step.

It gets more complicated.

A few months after Dowling’s report, Lennart Ante’s work from the “Blockchain Research Lab’ further clarified the ways in which crypto markets might affect NFT markets. Ante’s findings suggest that “Bitcoin price shocks trigger an increase in NFT sales”, although “Ethereum price shocks reduce the number of active NFT wallets.”


But, to complicate what Lennart Ante found, a study from Aharan & Demir in the fall of 2021 posited that outside shocks (from common asset classes, including Ethereum) have little impact on NFT returns. Most interestingly, they proffered that NFTs act as “recipients of risk spillover” during times of crisis (like covid) and thus might offer “potential diversification benefits” similar to “safe-haven assets, such as gold and the U.S. dollar.”

That’s quite the 180: reframing our jpegs as independent, safe-haven assets. Don’t get too excited, though, because later research from Umar et al. refined the safe-haven theory by highlighting that NFTs only act as receivers of risk spillover for short time frames of less than two weeks.

Finally, let’s add in the findings from DappRadar’s 2022 annual report, where it was pointed out that despite Ethereum’s down-year, and stagnation of NFT trading volume (up only 0.41%), a correlation-challenging trend emerged: the number of unique NFT traders and NFT sales went up 876.89% and 10.16% respectively.


So, where does that leave us at this point in the research arc?

If we try to smoosh all the academic and on-chain findings into one statement, we end up with something ugly and unsatisfactory like: the NFT market has neither convinced us that it’s significantly correlated with Crypto Market movements, nor has it convinced itself that it's sufficiently untethered.

Which brings us to our final point . . . maybe we’re looking at this topic in the wrong light.

There Is No Spoon

Perhaps, what really makes this whole NFT-crypto correlation so hard to pin down is the fact that NFT markets are a rapidly moving target. Multiple of the aforementioned studies alluded to a parent-child relationship between NFT and crypto markets — in the short term, the child (NFTs) have free will to act independently, BUT over a long enough time frame, they tend to revert onto the path of the parent’s (crypto) agenda.

Yet if this parent-child metaphor holds water, then maybe all this speculation is futile – not only are we trying to predict a child’s future height while they’re rapidly growing, but their parent’s still growing too.

Better yet, what are we hoping for when we ask whether the NFT market is correlated with the Crypto market? It probably depends who you ask and when you ask them. We’d imagine, the non-NFT holder would be happy to hear that the NFT market is correlated with Crypto markets; it solidifies the idea that NFTs are just alts with pictures attached to them — you know, the risk-tail of this massive crypto monster. On the other end, though, we’d imagine that NFT holders would prefer to hear that the NFT market is largely independent from the crypto market (although it makes trading and pricing NFTs a bit more uncertain (and thus scarier)); it would validate the notion that NFTs are a unique, valuable technology, and that we’re on to something not even the crypto bros have priced in.

In the meantime, we can speculate all we want, but Bob Marley probably said it best:

“Time alone, oh, time will tell”

Disclaimer: This is not financial, legal, or tax advice. This article is strictly educational and is not investment advice, legal advice, tax advice, or a solicitation to buy or sell any assets or to make any financial decisions. This newsletter is not legal, financial, or tax advice. Talk to your lawyer, accountant, or tax professional. Do your own research. See Flip’s Terms of Service for more details.

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