The 5% Problem Holding Back NFTs

In the past 1 year Bitcoin is up 97%, Ethereum is up 60%. Solana is booming, layer 2 tokens are booming, and yet NFTs remain down.

Are NFTs done? Will prices ever return to the mania levels we saw in 2021 and 2022?

I’d argue that as long as interest rates remain elevated, NFT prices will remain depressed.

Three major events occurred in mid-2022, around the time NFT prices reached their all time highs. First, the Fed began raising interest rates on March 17, 2022, with a 0.25% increase of the Federal Funds Rate to 0.50%. Second, in May 2022 stablecoin Terra collapsed and erased $40 billion in value from the crypto markets. Third, in November 2022 cryptocurrency exchange FTX collapsed.

Since that first rate hike, we’ve had 10 additional increases resulting in a 5.50% rate. Today you can get a 5.3% APY on a 1-year CD. With a possible recession looming, why would you risk your capital on buying risky NFTs? Even if we get a soft landing, why risk your capital when you can get 5.3% risk free?

As the Wall Street Journal reports, trillions of dollars are currently parked in money-market funds.

Rising interest rates drew trillions of dollars into money-market funds and other cash-like investments in the past two years, with more than $8.8 trillion parked in money funds and CDs as of the third quarter of 2023. Investors are optimistic that with rates poised to fall, people will redirect that money and fuel markets’ next leg higher.

Wall Street Journal

Wall Street is pinning its hopes on cash moving from money-market funds to provide the next big boost. Rates above 5% were flashy after years of safe investments offering little interest. Their fall could drive investors to U.S. stocks, which have historically provided the highest returns in the long run. 

Wall Street Journal

Wall Street consensus is that rate cuts are coming this year. Questions remain on how soon and how many. The Fed has signaled that they expect rates to remain above 3%, and decline to 2.9% by the end of 2026.

Once interest rates start coming down, and investors start feeling anxious about earning 3% (especially if inflation is above 2%) in their money market accounts, where will they start to allocate those trillions of dollars on the sidelines?

Will NFTs get another bull run?

Mark Wiggins, 27, a management consultant living in Miami Beach, Fla., is currently stashing 17% of his income in a high-interest savings account earning 4.4%. Another 13% goes into his 401(k). When rates were lower, he would invest a percentage of his paycheck directly into stocks and crypto. He is planning to invest a significant chunk of his savings. “If rates fall below 3.5%, I would probably cut the amount I’m putting into my savings and instead direct deposit to my investment brokerage or crypto,” he said.

Wall Street Journal