In-depth analysis of the correlation between NFT and ETH

Original title: "In-depth analysis of the correlation between NFT and ETH"

Original author: NFTGo

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Introduction

Since the crazy rise last summer, NFT   is facing a market cooling-off period in history. We investigated the performance of blue-chip NFTs in our first article, and this article will continue to examine the macro trends driving price changes in the NFT market.

Over the past week, there has been over $246 million in transaction volume on Ethereum, with transactions on the market primarily denominated in  ETH  . As the value of ETH fell from an all-time high above $4K to $1K, NFT valuations were also affected by this plunge.

In such uncertain and speculative times, we can use data to find signals from noise and make data-driven decisions. In this post, we will examine the correlation between ETH and NFTs.

How is the market value of NFT and ETH calculated?

In general, market capitalization is a metric for analyzing the dollar value of a company, NFT collectible, or cryptocurrency. This indicator is based on the asset's current share price and its total outstanding shares. Since both stocks and cryptocurrencies are fungible assets, the market capitalization of these types of assets is calculated by multiplying the total number of outstanding shares by the current market price of one share. For example, if a cryptocurrency has a total of 1 million shares priced at $20 each, its market capitalization would be 100*$20 = $20 million.

In NFTs, each NFT in a collection may have a different value due to rarity and other dynamic factors. The NFT market is also composed of ERC1155 (Semi-fungible) Token. In order to accommodate these two factors and provide an accurate representation of the total value of NFT collectibles, the NFTGo.io market cap calculation is the maximum value between the floor price of NFT collectibles and its latest transaction price. In this way, we can exclude some of the highest-priced collections to reflect the total value of the collection.

Why is market capitalization important?

Market value plays a key role in evaluating the potential upside of a project, and market value is one of the important indicators for investors to measure NFT's willingness to pay. While the average price of an NFT may be overvalued or undervalued, market capitalization more accurately determines the total value of NFTs. Before investing in an NFT project, it is very important to pay attention to market value, floor price, and average price. The market value represents the risk and value of the project, and these dynamic factors are related to how to make strategic investments in NFT.

1- Risk Management

Risk reduction and portfolio diversification are successful NFT investments Key components of strategy, risk management and predicting risk allow players to make better decisions in speculative markets.

Similar to oak trees with stronger trunks and roots than smaller saplings when a storm hits; relative to newly released projects and projects with low market capitalization , NFT projects with high market capitalization are usually less volatile, which illustrates the key role of market capitalization in risk management. This article will explain the volatility of more different types of NFT projects.

2- Value

The current situation of the market determines the market value. This indicator can help investors judge the valuation of NFT by other investors, and help traders and investors identify high-value projects.

The correlation between ETH and NFT

Dizzying sell-off after aggressive liquidation As a result, the price of ETH has shrunk sharply, while the NFT market is mainly denominated in ETH, and almost all NFT transactions are completed by ETH or WETH.

Revaluation ROI of NFT and ETH

ETH's market value has changed from 2021 From a high of about $550 billion in early December to less than $130 billion in June 2022, both ETH market capitalization and NFT market capitalization have fallen together over the past three months.

The chart below shows the rescaled ETH and NFT market capitalization returns from this period to today. In the rebasing chart, both market values start at 100, above 100 indicates an increase, and below 100 indicates a decrease from the initial value. The common downtrend of ETH and NFTs shows a strong correlation.

Last 3 months

Another interesting data point in the chart is that the NFT market has had a very strong performance compared to ETH during the current bear cycle Strong elasticity. While ETH is down over 50% from its initial market cap, the NFT market is only down 30%.

Why is NFT crashing less than ETH?

It is worth considering that NFTs are a very small subset of the crypto market. NFT brings together culture, art, finance and transactions, providing a decentralized way to connect creators and fans. ETH is several orders of magnitude more mainstream than NFTs, and there are huge funds with high leverage in the cryptocurrency market that have been liquidated significantly in the past few weeks. All these dynamics have played together to cause a larger decline in the market value of ETH, below The chart below illustrates the market size of the two assets.

ETH and NFT market value Scale Comparison

The cryptocurrency market has gone through several iterations and cycles since 2009, and over time these digital assets have become the go-to for trading and investing One of the mainstream methods. Large funds and market makers are heavily invested in top crypto assets like Bitcoin and Ethereum. Compared to NFTs, cryptocurrencies are a mature market sector in the blockchain ecosystem.

One way to quantify how mainstream NFTs are relative to cryptocurrencies is to calculate the ratio of NFT market capitalization to mainstream crypto assets like ETH. For example, on March 21, 2022, according to YCharts, ETH's market capitalization was $238.3 billion, and NFTGo.io recorded an NFT market capitalization graph of $19.3 billion on this day. The NFT/ETH ratio on March 21 will be 19.3 / 238.3, roughly equal to 0.26. On the other hand, the numbers changed on Dec. 5, when ETH was $498 billion and NFTs were $9.8 billion. These changes in the NFT/ETH ratio can show how close NFTs are to the size of ETH’s market cap over time. In this case, the focus of the analysis is not necessarily to predict when NFTs will reach a ratio of 1, but to analyze the growth rate of NFTs relative to mainstream assets such as ETH.

The chart below shows the NFT/ETH market capitalization ratio from the end of November 2021 to May 2022. We can observe an increase in the NFT/ETH ratio. This ratio has grown from below 0.02 by the end of 2021 to above 0.05 in just two months. The NFT market continues to grow again, from 0.05 to now getting closer to 0.08.

Last 3 months The ratio of the market value of NFT to ETH

The logarithmic scale of the return on investment of NFT and ETH

Earlier, we looked at the reinvested ROI of NFTs and ETH. However, over the past 3 months, both NFT and ETH prices have fluctuated wildly. To capture these drastic changes, we can use a log scale chart to accurately analyze the ROI percentages for various large and small changes. The chart below shows the ROI of ETH and NFTs relative to their market capitalization at the start of the week.

ETH and NFT ROI relative to log scale 30 days ago

We can observe that both ETH and NFT are moving in the same direction. As ETH fell, the price of NFTs also began to fall, and therefore, their market cap also fell. However, ETH’s market capitalization has changed more dramatically than NFT’s. By only zooming in to the past week, we can see more subtle changes from the NFT market.

ETH and NFT Log scale of return on investment relative to 7 days ago

Correlation coefficient

Two The correlation coefficient of data points gives us insight into the degree of dependence between them, and studying the correlation of two variables allows us to understand the dynamics of the influence of each value.

A correlation coefficient close to 1 means that there is a one-to-one relationship between the two values. In our case, this means that the NFT market closely follows the market cap of ETH. Another situation may be that there is a subtle correlation between the market value of NFT and ETH. In this case the correlation will be close to zero. We can use a scatterplot to illustrate the correlation between NFT market capitalization and trading volume. Before we examine the results, the chart below shows how each case of positive, negative, or zero correlation appears in the scatterplot.

different degrees of correlation The results of the scatter plot

The scatter plot can also show the correlation strength between two values. The above charts are theoretically complete positive correlation and negative correlation or the case of zero correlation. In the real world, however, these correlations may be weaker and even show consolidation.

The strength of these correlations depends on the cycle of the market.

The chart below illustrates the correlation between NFT and ETH market cap over the past 3 months. The x-axis represents the total market capitalization of NFTs, which grew to over $38 billion at its peak, and the y-axis represents the market capitalization of Ethereum over a 3-month period over the same period.

Last 3 months Correlation between ETH and NFT market capitalization

However, when we extend the time frame to 1 year, the correlation is not always negative or positive. In the NFT market, there have been times when the correlation was both negative and positive, and NFTs did not directly follow ETH trends. The unique bull market of NFT, a large number of issuances, the entry of giant whales, and the emergence of new blue chips can all make the NFT market more independent of the ETH market.

ETH in the past year Correlation with NFT market value

Analysis of the Pearson correlation between NFT and ETH

Peel Poor correlation is a formula used to analyze the strength of a linear association between two variables. This value (denoted by r) can be between -1 and 1. Depending on the value of r, we can analyze the linear correlation between two variables.

Pearson correlation coefficient

Using Bitcoin as a reference

Bitcoin is widely considered to be strongly correlated with ETH. Since these two cryptocurrencies make up a large percentage of the overall cryptocurrency market capitalization and are two of the most popular cryptocurrencies, they usually rise and fall together during times when the market buys low and sells high. We can use the strong positive correlation between BTC /ETH as a reference for analyzing the strength of NFT/ETH correlation.

Correlation is unstable

However, we need to consider the Sexuality. When analyzing financial assets, it is worth remembering that correlation is a cyclical and contextual factor. The strength of the association between two assets, even a positive or negative association, can change over time. To illustrate this, we analyze the Pearson correlation of two pairs: ETH/BTC and ETH/NFT in four different time windows:

Long term : 1 year

Mid-term: 3 months

Short-term: 1 month

Short-term: 1 week

The graph below illustrates the Pearson correlation of these two currency pairs over the past year. This graph illustrates how volatile the correlation between two speculative assets can be, even if the two assets are ETH and BTC, and they are both in the cryptocurrency space, the negative correlation between the two assets is that they A signal of a unique value proposition in the market. We can observe that the ETH/BTC correlation is closer to 1 than the ETH/NFT correlation. Using BTC’s correlation with ETH as a reference, we can observe an independent movement of the NFT market relative to ETH.

In the past year Pearson Correlation Between ETH/BTC and ETH/NFT

Could NFT be a hedge against crypto crashes?

Most importantly, a correlation close to zero indicates independence from other assets, while an asset with a negative correlation is used as a hedge against other assets. A concrete example is hedging against a declining dollar by holding assets such as gold. NFT and digital collectibles are used as a hedge against the possible decline in cryptocurrencies such as ETH.

Cryptocurrencies have been in a bear market since early 2022. But the NFT mania continues, with projects like Otherdeed and Moonbirds enjoying great success in the crypto bear market. The chart below narrows the time frame to 3 months.

The past three months Pearson Correlation of ETH/BTC and ETH/NFT

The graph below illustrates the Pearson correlation of the two currency pairs over the past month. In this time window, the correlation of ETH and BTC has been very close to 1, and it has remained almost flat during these three months. However, even though NFTs started the period with a correlation close to 1, the correlation between NFTs and ETH has been trending negatively since June 13. NFTs have been shifting toward more volatile correlations lately compared to the beginning of the month. This could be caused by several events specific to NFTs.

1- Blue chip favorites and new companies like Yuga Labs and others make new announcements

2- NFT NYC

ETH/BTC and ETH/NFT in the past month Pearson correlation

But this is not always the case. As we shorten the time frame to the current bear market, we can see a stronger positive correlation between ETH and NFTs. In the past week, the market value of NFT and ETH has been strongly correlated, which shows that NFT is more related to the ETH market than in the bull market. The cooling period of NFT Summer has been replaced by the slow pace of blue-chip NFT launching new series to expand the brand.

The past week ETH/ Pearson correlation between BTC and ETH/NFT

Can NFT survive this crash?

Over the past few weeks, the cryptocurrency market has been rocked by the latest macro events. The $LUNA crash in early May was a prelude to a cryptocurrency recession, the result of aggressive rate hikes by the U.S. Federal Reserve.

Amid the global pandemic, the bull cycle in the cryptocurrency market has now transitioned into liquidation, with hedge funds losing highly leveraged positions and cryptocurrency investors experiencing other A sharp drop in the total value of the portfolio.

It is worth noting that while NFTs, DeFi  and cryptocurrencies have fundamentally different dynamics and value propositions, just like how the stock and cryptocurrency markets go up together The same dynamics can affect NFT market sentiment as well.

These correlations between ETH and NFTs provide an opportunity to spot lows and highs in the NFT market. However, we have observed that sometimes the NFT market does not correlate with ETH, suggesting that NFTs can be seen as a separate asset class at the time of hype. We have also seen that the NFT market has not changed as much as the ETH market in the past period. This is mainly due to the leveraged positions and liquidation of the ETH market that have increased buying pressure, so there is still a long way for NFT to become a mainstream market.

This bear market may have wiped out some NFTs, but many more are recovering from the market crash.

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