We’re just a month into the new year, and the crypto market is already confronting a strange puzzle: the prices of NFTs – unique digital assets hosted on a blockchain – are rising, even as cryptocurrencies plunge into bear territory. Let’s find out why.

What’s been happening to NFT prices?

As of the end of January, the two biggest cryptocurrencies – bitcoin and ether – had lost nearly half their value since reaching all-time highs in November, taking the rest of the crypto market down with them. But the top 100 NFT collections together lost only 15% of their value in the same period, according to DappRadar. Interestingly, “blue-chip” NFT collections – the most established and valuable of them, like Bored Ape Yacht Club (BAYC), Mutant Ape Yacht Club, World of Women, and Doodles – have all actually increased in dollar value since November.

What makes this so impressive is that you’d expect speculative assets to be hit the hardest when central banks are beginning to tighten monetary policy. That’s why unprofitable, expensive-looking growth stocks have had a terrible year so far. Yet NFTs – arguably the most speculative investment in the world right now – have held up just fine. Why? Well, the truth is that because the NFT market is still so young, no one really knows for sure – but I wanted to share a few of the best theories with you.

Theory 1: NFTs reprice themselves higher whenever ether dips

Most NFTs are denominated in ether, which means they’re showing signs of negative correlation with the crypto’s price. Just look at the graph below, which shows BAYC’s floor price (in ether) compared to the price of ether (in dollars).

Negative correlation between ether and BAYC’s floor price. Source: DappRadar

So the trend we’re seeing is that when ether goes down, NFTs – especially blue-chip NFTs – reprice higher to match their dollar value before the dip. BAYC’s floor price has actually increased by 14% in dollar terms during the recent crypto bear market, so the collection has in a way become a unique asset class that’s stored value in its – admittedly very short – history.

Interestingly, NFT prices (in ether) don’t go down when the price of ether goes up. Again, no one can really say why, but perhaps it’s got something to do with speed: dips are often fast, whereas price rises are slow and steady. So the cycle goes something like this: an NFT collection launches and grows over time, establishing its floor price. Ether dips hard and fast. The NFT floor price rises in ether terms as a reaction to the dip. The market gets used to this new floor. Ether prices steadily recover over time, and the NFT collection continues to trade at its higher ether floor price. Repeat.

Theory 2: NFTs are still in the fastest phase of their adoption curve

NFTs came into existence way later than crypto. They’re so new that they’re arguably still in the fastest, earliest phase of their adoption curve, attracting growing mainstream attention by the day. In fact, Google searches for the term “NFT” are outpacing those for “crypto” for the first time ever. Giant brands like Adidas, Coca-Cola, Pepsi, Budweiser, Gucci, Dolce & Gabbana, Burberry, and many others have either launched their collectibles or have partnered with big NFT teams to make their dent in the space.

This is further supercharged by celebrity endorsements. Stars with a massive social reach like Neymar Jr. (200+ million social media followers) and Kevin Hart (192+ million social media followers) have publicly announced their recent entries into BAYC. They join the likes of Serena Williams, Paris Hilton, Eminem, Snoop Dogg, Mark Cuban, and plenty of other big names.

What’s more, NFT adoption is expected to increase even more as resistance from non-crypto savvy users decreases with the launch of new products specifically aimed at reducing friction. For example, the upcoming Coinbase NFT marketplace – which already has more than 3 million people on its waitlist – will directly integrate MasterCard payments, making the whole process of buying and owning NFTs a breeze. Similar products are also being launched by other crypto exchanges, as well as by big Web2 players like Facebook and Instagram.

Theory 3: NFTs enjoy scarcity value

“Scarcity” might seem like an odd word choice when you have new NFT collections launching every single day. But don’t forget we’re focusing our analysis on blue-chip NFT collections here. And these collections have a limited supply of NFTs – say 10,000 or 20,000 – that will remain the same forever.

It’s easy to forget how small a set of 10,000 really is. In his first keynote speech after Facebook changed its name to Meta, Mark Zuckerberg said he wanted to onboard one billion people to the metaverse within a decade. Let’s say only 20% of these people – 200 million – are interested in having a digital avatar to go hand in hand with their digital identity on the metaverse. Then let’s say you have 100 in-demand digital avatar collections of 10,000 NFTs each, for a total of 1 million very popular NFTs. That represents just 0.5% of the assumed 200 million-strong demand. That’s basically a rounding error.

What’s more, many big Web2 players are integrating NFTs as digital avatars into their platforms. Twitter – perhaps the most popular social media platform with crypto and NFT enthusiasts – launched their much-anticipated official verification mechanism for NFT profile pictures last month, with Instagram and Facebook expected to follow. That helps combat the anti-NFT narrative that screenshotting an NFT is the same as owning it. With Twitter’s new authentication capabilities, it’s impossible to front an NFT you don’t own. So for the first time ever, your NFT is intrinsically linked to you and you only.

So when you mix a relatively small supply of blue-chip NFTs, increasing interest in digital avatars, more Web2 platforms allowing you to properly use them, and the very human trait of FOMO, you can understand why NFTs might be enjoying scarcity value at the moment.

Theory 4: NFTs attract a different kind of investor

The recent strength of the NFT market could suggest there are many NFT investors who don’t overlap with the core crypto community, which sold off assets during the recent downturn. These NFT investors could have longer time horizons, or they may be holding onto NFTs for identity, belonging, an emotional connection with the art, a strong belief in the future of NFTs, or a whole host of other non-financial reasons.

There’s even an argument for viewing certain NFTs as cultural pieces – across art, music, tickets, sports, fashion, and more – rather than digital assets. That’s a very different asset class to crypto, which can be viewed as early-stage, venture capital-like investments in blockchain technology and the applications being built on top of this technology. And if that’s the case, NFTs and crypto will attract two completely different breeds of investor and their prices will behave differently.

Theory 5: NFTs are in a bubble

This is the more skeptical theory: the NFT market – or parts of it, at the very least – look a bit frothy, and it could be set for a correction. We said earlier that NFTs came into existence way later than crypto. The latter has had its fair share of boom and bust cycles, and perhaps NFTs will follow suit – albeit with a delay. The big test now is whether NFTs truly constitute an asset class that stands apart from the rest of blockchain technology, or will just end up as a pop culture fad that fizzles out. Only time will tell…