Cryptos & NFTs
Date: 20 February 2023
Author: Gaya Chandrasekaran
In this article we discuss developments during mid-last year that meant direct purchases of NFTs are no longer entirely restricted to holding cryptos in your wallets but can increasingly be done through fiat (although only on some marketplaces).
We also explore the meaning of crypto winter, what caused the crash in 2022 and why cryptos were considered an inflation hedge to begin with, how cryptos behave in extremely volatile financial markets.
Thereafter, we understand briefly what drives the valuation of NFTs and my personal views on what this means for the market and players. Exciting…
First a question?
NFTs can only be bought using cryptocurrencies: True or False?
False, of course.
In Jun-22 Mastercard announced that it will be partnering with some of the crypto-native companies such as Immutable X, Candy Digital, The Sandbox, Mintable, Spring, Nifty Gateway and Web3 infrastructure provider MoonPay to allow customers to purchase digital assets (i.e. NFTs) without owning crypto outright.
According to Mastercard, about 45% of people it surveyed have purchased an NFT or would consider doing so with more flexibility.
Mastercard already partnered with Coinbase in Jan-22 to allow Coinbase customers to use their credit & debit cards to make purchases on Coinbase’s NFT Marketplace.
This option is not universal though as its available only on limited channels (meaning you can’t use debit or credit cards on any NFT marketplaces), but this is a great start and only goes to show the direction in which things are moving.
Mastercard’s Raj Dhamodharan, EVP Blockchain / Digital Asset Products & Digital Partnerships at Mastercard, said, “Getting more people involved safely and securely is perhaps the best way to help the NFT market thrive. As it does, Mastercard sees even greater potential for NFTs’ underlying tech to go beyond art and collectibles into many more areas.”
Does the Crypto Winter Spell the Death of NFTs?
Let’s first start by understanding just what ‘Crypto Winter’ means.
According to Investopedia, the term is comparable to that of a bear run in the stock market.
creeping up since early this year, please refer to the 5Y chart below.
Essentially, a crypto winter signifies negative sentiment and lower average asset values among a large set of digital currencies.
What caused the Crash in 2022?
The crash started when rising inflation caused the Federal Reserve to increase interest rates to arrest inflation.
Cryptos turned out to be more correlated with tech stocks than gold prices despite their reputation as an inflation hedge. The reason why it was expected to be more correlated with gold was that Bitcoin (as a proxy for cryptos) was expected to have an intrinsic store of value over time as it becomes more accepted, much like gold.
However, Bitcoin’s behaviour became increasingly correlated with that of growth stocks vs. gold. The tech industry’s swift decline precipitated the crypto crash. Subsequently algorithmic stablecoins – TerraUSD and Luna, became worthless.
Terra-based DeFi protocols as well as over-leveraged hedge funds holding luna also suffered significantly. And then, there was a string of crypto-related bankruptcies including that of Voyager Digital, Celsius Network, FTX, BlockFi and Genesis Global Capital.
General sentiment in relation to anything crypto has nose-dived and we find ourselves amidst the third crypto winter now. Bitcoin price has been slowly
Why were Cryptos considered an Inflation Hedge?
Initially crypto experts considered Bitcoin as an inflation hedge because of its limited supply of 21 million and speculative nature (unlike fiat currency whose supply can be increased by Central Banks to tackle a crisis).
However, as things unfolded over the past 12 months it seems to work better as a hedge against rising prices when caused by monetary expansion as opposed to when caused by disruption of the food supply and energy (key driver of 2022 cost of living crisis).
Omid Makekan, a Professor at Columbia Business School specialising in crypto and blockchain technology, said, ‘While cryptocurrencies like bitcoin are “not proven” to be a reliable, long-term store of value, they could still gain acceptance over time and become less volatile. Once volatility smooths out, we will have a better picture of how it responds to macro developments, like the rate of inflation or what the Fed is doing’.
Right, so now back to NFT’s…
Valuation of NFTs
- Much of what confers value to NFTs is the sense of community and the ability for NFT owners to engage with other holders within the collection.
- There are several factors that contribute to the value of an NFT – utility, liquidity, tangibility, rarity, interoperability, ownership history, social proof and speculation and continuous change in the NFT ecosystem. Digital Assets are in general difficult to value using traditional methods.
- The common methods to value digital assets include asset approach (asset value is based on fair value of its underlying assets minus current obligations), market approach (based on value of similar NFTs), cost approach (opportunity cost serves as a proxy where secondary market transactions are absent coupled with inadequate liquidity), DCF (based on prediction of the asset’s unhedged cash flow discounted to today’s value).
- There are a few firms that offer NFT valuation services such as NonFungible.com and Eqvista for a price.
NFT valuations are down since crypto winter set in.
My personal view is that this is to a large extent tied to the fact that NFTs are priced in cryptos. For instance, if as a creator you priced something at 1 ETH (Ether), obviously the value falls to the new level of ETH and then coupled with negative sentiment you may no longer be able to sell this at 1 ETH, adding a liquidity premium to the price.
The fall in value does not reflect any deterioration in the fundamental utility or applications of NFTs. Hence scope remains intact, however the pace of adoption has perhaps become slightly protracted.
Nevertheless, given the market lows and depressed values its also a good time to explore economic options for setting up the NFT infrastructure ahead of the next phase of growth.
Coming Up / Next time...
We will explore NFT use cases in my next article in Mar-23; How brands are using NFTs to engage with customers and how businesses are increasingly using NFTs to create and engage with communications within their target audience.
Watch this space...
Please note the opinions expressed within the content are solely the author's and do not reflect the opinions and beliefs of people, institutions, or organizations that the owner may or may not be associated with in a professional or personal capacity.
- You Can Now Buy NFTs Without Crypto – Blockworks
- The Crypto Winter: What Happened & the Long-term Effects | ZenLedger
- Crypto will become an inflation hedge — just not yet (cointelegraph.com)
- Why bitcoin doesn’t seem to be a hedge against inflation (cnbc.com)
About the Author
Gaya works in the Global Digital Solutions Group (DSG) within Santander Corporate & Investment Banking (SCIB), which focusses on developing innovative, sustainable and profitable digital capabilities and providing state of the art advisory services to clients. She joined Santander in 2014 gaining broad experience across Corporates & FIG in SCIB and has also worked on several strategic initiatives including regulatory deliverables. Her work involved deal structuring, due diligence and portfolio management. During this period, she has won awards and nominations to Accelerating You Programme for Future Leaders and Global Risk Leadership Programme.
Gaya recently completed the Fintech Programme from Oxford University. She holds a Masters in Finance from London Business School (Recipient of Graduating Student Award) and an MBA (Gold Medallist) from India.
She has contributed actively to alumni engagement at LBS since graduation through several leadership positions, most recently as an ExCo Member of London Alumni Club where she led events on identifying fintech winners, cyber risk, sustainability & factor investing involving C-suite speakers, industry experts and faculty. Gaya is a Mentor and the Head of Personal Excellence Programme (PEP) for London with Women in Banking & Finance (WIBF). She is passionate about supporting women in their ambitions and enjoys organizing knowledge-sharing networking events.
Outside her day job, Gaya is a self-taught artist and has been influenced by art right from her early childhood. She loves learning new techniques and underwent training in India as well as in the UK (Slade School of Art). Her choice of themes are inspired by key life moments. An expression of her thoughts and emotions, her artworks invite the audience to go deep within, explore and connect with their own experiences. Gaya offers NFTs in lieu of a Certificate of Authenticity to all her collectors – its her mission to facilitate digitisation to her audience. Based on feedback from a renowned NFT Collector she is now exploring software tools to mint NFTs of pure digital artworks.
Gaya’s first solo exhibition was in 2018 at Santander’s London office, a fundraiser where she sold >70% of artworks donating 50% of proceeds to charity. Her painting, ‘The Golden Lion’ won a special commendation in the David Shepherd Wildlife Foundation’s #sketchforsimba competition in 2019. She conceptualised the first ever Art Exhibition within the LBS community, which led to LBS Art Week in 2021 where her paintings were selected for the online exhibition and she was a chosen speaker of the Artists Panel. She exhibited her artworks with The Holy Art Gallery and The Boomer Gallery in London during 2022. Her artworks are published in the Artist Talk Magazine Issue 22 & 23.
“Please note the opinions expressed within the content above are solely the author’s and do not reflect the opinions and beliefs of people, institutions, or organisations that the owner may or may not be associated with in a professional or personal capacity.”