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The Global Non-fungible Token


Non-fungible tokens (NFTs) are the first publicly known implementation of blockchain technology in early 2021. NFTs are transferable rights to digital assets (pictures, music, films, and virtual creations) whose ownership is documented in blockchain smart contracts. We study whether NFT price is connected to cryptocurrency pricing, given that the NFT market arose from cryptocurrencies. The Spillover Index reveals just a small amount of volatility transmission between cryptocurrencies and NFTs. However, wavelet coherence analysis suggests that the two markets are cooperating. This shows that knowing the pricing behavior of cryptocurrencies might help with NFT pricing models. However, the minimal volatility transfer suggests that NFTs, unlike cryptocurrencies, might be considered a low-correlation asset class.

Enterprise blockchain has many benefits in various projects.

Non-fungible token (NFT) markets emerged to some prominence in early 2021. These new markets for digital assets grew to about $550m of lifetime total traded volume towards the end of March 2021, but over $200m of that trade happened in March alone. This trade growth was matched by an immense increase in public discussion and traditional media coverage of NFTs.

The Global Non fungible Token

Weekly count of news coverage (print, online, television) mentioning ‘non-fungible token’ (early 2021). Source: author own calculations from LexisNexis news database.

Any sort of digital material can be used as an NFT. The most general categories are collectibles and artworks, virtual world items, and digitalized characters from sports and other games. An NFT begins with the registration of a digital asset’s ownership on a blockchain, commonly on the Ethereum network. After that, the digital asset may be sold with ownership changes, and the bitcoin payment received is recorded on the blockchain.

The CryptoPunks is an example of an NFT that is part of the data examined in this study. At the time of writing, CryptoPunks is the largest single traded market in NFTs, with about $200 million transacted during its lifespan. The market began in early 2017 when 10,000 unique digital characters were produced and registered on the Ethereum blockchain as distinct assets. The characters were selling for $50 to $100 each until April 2020, when they began a slow, inexorable price climb that culminated in an early 2021 price explosion. Individual CryptoPunks were selling for between $20,000 and $100,000 in February and March 2021.

The Global Non fungible Token1

Daily (top) and weekly (bottom) average pricing of Decentraland LAND NFTs, March 2019 to March 2021.

NFTs, while traded through cryptocurrencies, have some very different characteristics from cryptocurrencies, and this is important to bear in mind when trying to understand them. Cryptocurrencies are intended primarily as currencies, even if they maintain some asset-like properties (Baur et al., 2018). NFTs, on the other hand, are designed to be pure assets. Indeed the term non-fungible in the NFT name is the clue to this difference.

One of the fundamental properties of cryptocurrencies and money, in general, is fungibility, or interchangeability (one bitcoin is the same as another bitcoin, and one dollar is the same as another). The non-fungibility of NFTs is one of the most valuable asset qualities.

All NFT market participants are well aware of the significant overlap between cryptocurrencies and NFT market players. This is partly because buying an NFT requires a cryptocurrency as a form of payment, which is a degree of complexity that many people find unusual. With this in mind, we explore the crossover effects between Bitcoin and NFT pricing. Cryptocurrencies are predicted to impact NFT pricing as larger markets tend to spill over into smaller related markets, and cryptocurrencies make up the much larger NFT market. As NFTs and their popularity point to the best enterprise use case for blockchain, their price impacts the cryptocurrency markets. As a result, this raises an open business question of what practical applications blockchain and cryptocurrencies based on it have.

With this understanding of the trader crossover between the two sets of markets, this study examines the interrelationships between cryptocurrencies and NFT markets.

Given the overlap in cryptocurrency and NFT trading and the primary effect of bitcoin pricing potential on NFTs, it’s crucial to determine if the volatility extends to the NFT markets. To fully comprehend this, we must investigate whether there is a correlation between cryptocurrency and NFT returns, as correlation has been demonstrated to be an essential aspect of cryptocurrency markets. Finding linkages between the two sets of needs is beneficial to researchers and practitioners since we may utilize bitcoin price patterns to predict NFT market movements.

This contributes to the nascent literature on NFT pricing. This study reveals that pricing does not exhibit indicators of underlying efficiency in one NFT market, although there are some new signs of price behavior modifications. Given the variety of NFT marketplaces, the essential contribution is demonstrating how NFT price relates to cryptocurrency pricing. We find modest volatility transmission and some significant evidence of co-movement, which gives us a framework for predicting how NFT pricing will change as markets develop. Research on a broader scale helps to understand how to price behavior evolves in new marketplaces.

In the next section, we will discuss the data and methodology. It also contains conclusions and analyses.

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