Disclaimer: This content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. Nothing contained in this report constitutes a solicitation, recommendation, endorsement, or offer by MetaStreet or any third-party service provider to buy or sell any securities or tokens or financial instruments in this or in in any other jurisdiction in which such solicitation or offer would be unlawful under the securities laws of such jurisdiction.
🡺 Discord: https://discord.gg/metastreet
🡺 Website: www.metastreet.xyz
🡺 Twitter: https://twitter.com/metastreetxyz
In previous months, we’ve speculated on the correlation between NFT prices and ETH prices, going as far as to posit that with increased mainstream adoption of some NFT projects, pricing NFTs in dollars could be more appropriate than in ETH (much to the chagrin of OG NFT investors). We want to revisit this discussion with the backdrop of both major macro headwinds (inflation, supply chain challenges, war in Europe, etc.) and crypto-specific market challenges (Luna blow up & subsequent bankruptcy ripple effects) driving prices down ~80% from ATHs. Are NFTs correlated to ETH, and how does the answer to this question inform an investor’s decision making process (whether in the equity or debt position)?
TL;DR? It’s complicated - so you should just go ahead and read the whole article.
Are NFTs “recession resilient”? In plain English, this is what an investor wants to know:
Ok, so how do we go about testing & ultimately answering the above questions?
While NFT’s are typically denominated in the underlying chain’s currency, our first look is at the NFT-USD market, since we at MetaStreet prefer to denominate our DAO funds in USD.
While we may get criticized by NFT purists for looking at this analysis from a USD perspective, those that survived the bear market in 2017-2018 witnessed the painful moments when projects were betting their treasuries on ETH. When the pain hits, it’s tough to hedge against market volatility, especially as USD denominated hedging instruments are more common than ETH denominated (insurance, options, etc).
Ok, let's get into the analysis. The following chart does a correlation analysis on NFT-USD vs ETH-USD performance over a 30-day window.
One important question still remains: Does the ETH price of an NFT have resilience to the ETH-USD market? Even if ETH price goes down, does it go down less?
CryptoPunks rallied significantly with the promotion of Christie’s NonFungibleNoah joining Yuga Labs as the “Head of CryptoPunks.” This kind of correlation behavior is only captured by the NFT-ETH correlation chart (below) given the sheer magnitude of ETH price drop experienced over Q2 2022. The NFT-USD chart above makes it a bit harder to see, but 2022-07 on the NFT-ETH chart demonstrates an illustrative correlation switch across the x-axis.
We bifurcate the NFT-ETH vs ETH-USD correlations across ETH’s moving average convergence/divergence (MACD) to see how NFTs could behave against a backdrop of positive/negative ETH price sentiments. This creates “UP” and “DOWN” categories based on ETH sentiment.
To apply this analysis, the highlighted numbers below illustrate the % of days where correlations were positive based on the ETH-USD momentum for CryptoPunks.
While the data is very short-term (multi-week), the UP and DOWN markets help us reveal that NFT-ETH prices may correlate to ETH price sentiment.
In CryptoPunks specifically, we saw 95% of positively correlated days in an UP market back in Q4 2021 where NFTs and ETH were booming together.
Starting April 2022, we saw a trend reversal, where ETH was going down and NFTs (in ETH terms) were also precipitously moving in the same trajectory (down). CryptoPunks: Of the 73 days of a DOWN market, we saw 59 days (81%) of positive correlation, aka the NFT is going down in ETH terms.
However (!), we did see a trend reversal as mentioned earlier with the recent CryptoPunk rally, where the Punks floor moved from a bottom of 45 ETH to closer to ~70 ETH amid Yuga Labs’ intention to revitalize the engagement for the collection via a new hire. Within their respective quadrants, there are still a lot of events to digest (e.g. Otherside land mint event for BAYC). This is why seeing an NFT-ETH correlation analysis might inform us of unique insights.
To finalize the main question: are NFT’s resistant to a recession?
While they may have historically been able to resist ETH price, the chart below consistently reveal that CryptoPunks’s ETH price have degraded their negative correlation with ETH in DOWN markets from 50-75% to 19%, revealing a recent shift toward low resistance & high susceptibility of price drops when ETH is going down. However, as CryptoPunks become more event driven via Yuga activism, they may begin to exhibit more resilient behavior against ETH price drops.