Cryptocurrencies and non-fungible tokens (NFTs) are closely intertwined. Initially, the NFT market was subordinate to the broader cryptocurrency realm, strongly influenced by cryptocurrency market trends.

However, the NFT landscape has evolved significantly over time. What was once a niche market has grown substantially and burst into the mainstream in 2021, fueled by celebrity endorsements. Collections like Bored Ape Yacht Club, for example, infiltrated popular culture and became sought-after symbols of status.

As time has passed, the relationship between NFTs and cryptocurrencies has become more nuanced. NFT advocates argue that NFTs have developed into their own distinct market, separate from cryptocurrencies. They highlight the unique characteristics and use cases of each sector.

Daisaku Harada, the chief of NFT marketplace Unikura, stated, "While cryptocurrencies are closely tied to traditional financial instruments like stocks and bonds, NFTs are believed to possess an artistic and community aspect that sets them apart."

Notably, NFTs have recently demonstrated a noticeable decoupling from the broader cryptocurrency landscape. NFT prices started declining later than the overall cryptocurrency market, a phenomenon referred to as the "lag effect," signifying a delayed response of the NFT market to cryptocurrency movements.

The lag effect

The cryptocurrency market reached its peak at over $3 trillion in November 2021, but the NFT market didn't reach its peak until January 2022 when the total crypto market cap had already fallen to $1.65 trillion, as indicated by the Forkast 500 NFT Index. The lowest point for the crypto industry in recent years occurred in December 2022 after the collapse of the FTX exchange, leading to an extended bear market. However, the NFT market is currently experiencing its own decline, with the Forkast 500 NFT Index dropping below 2,000 on September 24, 2023, for the first time since January 2022.

Carlos Prada, CEO of blockchain accelerator Masterblox, believes that this decline is due to a shift in investor behavior. Traditional retail investors who drove NFT demand are now adjusting their strategies and becoming more cautious. This trend is not limited to NFTs but is also seen in emerging sectors like the metaverse and play-to-earn ecosystems. Prada notes that the influx of capital from venture sources into NFT-focused enterprises and infrastructure appears to be limited.

Is the worst yet to come?

The NFT sector, being relatively new, is challenging to forecast due to limited historical data. Despite notable adoption by major players in fashion, sports, and music, the market's volatility raises concerns among industry insiders. The looming threat of regulatory action by the SEC adds to the uncertainty.

The SEC recently categorized NFTs as securities in cases involving the Impact Theory NFT initiative and Stoner Cats, signaling a potential shift in regulation. This stance could have significant implications for creators, companies, and trading platforms in the NFT space.

The regulatory landscape for NFTs remains murky, but U.S. entities and artists may soon be required to register with the SEC to avoid penalties. If other countries follow suit with similar regulations, it could further challenge the NFT market.

In addition to these challenges, some economic experts predict a global recession by late 2023 or early 2024. Considering these factors, the outlook for NFTs appears bearish.