In the early 2021s the Non-fungible Tokens (NFT) were the first use of blockchain technology that gained an unambiguous public acclaim. NFTs can be traded as rights to digital assets (images videos, music, images digital creations) in which ownership information is recorded in smart contracts that are stored on the blockchain. In light of the fact that the fact that the NFT market was created from cryptocurrencies We investigate whether NFT prices are influenced by prices for cryptocurrency. A spillover index only shows small effects of the transmission of volatility between NFTs and cryptocurrency. However, the coherence of waves analysis suggests that there is a co-movement between these both sets of market. This suggests that crypto pricing patterns could be of some help to understand NFT price patterns. However the transmissions that are low-volatility suggest that NFTs could be considered an asset class with low correlation that is distinct from cryptocurrency.
NFTs could be any kind of digital asset. Most commonly, they include artworks and collectibles and objects that are virtual as well as digitalized characters from other games and sports. A NFT begins by registering the the ownership rights of an item on an electronic blockchain, which is typically the ethereum network. The digital asset will then be sold with changes in ownership as well as an currency payment that is recorded in the Blockchain. Learn more about non-fungible tokens influenced by cryptocurrency.
A good illustration of an NFT that is part of the data analysis in this study, is those known as CryptoPunks. CryptoPunks are the most traded market of NFTs at the time of writing, having around $200 million in transactions over the course of its existence. The market began in the early part of 2017, when 10,000 distinct digital characters were developed and identified with individual accounts to the Ethereum blockchain. They were selling between $50 and $100 until about April 2020 after which they began a steady increasing price, which continued to increase until prices rising to the peak in early 2021. In February and March 2021 individuals CryptoPunks were selling for around $20,000 to $100,000.
While traded as cryptocurrency, possess distinct characteristics from cryptocurrencies that are important to consider when trying to comprehend the difference between them. They are primarily designed to be currency, even though they possess some similar properties to assets. NFTs however are designed to be pure assets. Indeed , the term not fungible within the NFT name is the key to this distinction. Interchangeability or fungibility is among the most important features of cryptocurrency and money generally (one bitcoin is exactly the same as another bitcoin, or a dollar is the same as another). The inability to transfer funds between NFTs is among the most important asset attributes that is highly valued.
However Anyone who is involved on the NFT market is aware of the significant connection between market participants in cryptocurrency as well as NFT buyers. This is due to the fact that in order to purchase an NFT it is necessary to make use of cryptocurrency as a method for payment, which can be a high amount of work for many individuals. In this regard, our research studies the cross-over effects between cryptocurrency prices in conjunction with NFT pricing. We expect cryptocurrency to impact NFT pricing, since generally bigger markets are more likely to spill over into smaller market and the cryptocurrency market is a significantly market than NFTs. NFT pricing may also impact the cryptocurrency market, since NFTs as well as their rising popularity show an impressive business application for blockchain. This is why it’s the question of what uses are practical for blockchains as well as cryptocurrency built on top of blockchains ( Morkunas, Paschen, Boon, 2019, Trautman, Molesky Trautman, Molesky, 2019,).
Based on this understanding of the crossover between traders in the two markets This study aims to study the interrelations between cryptocurrency as well as NFT markets. Moratis (2021) shows there is a substantial amount of shock transmission that occurs between the two cryptocurrencies as well as NFTs, which is dominated by Bitcoin leading this transfer. Due to the cross-over of trading between cryptocurrency and NFTs and the potential major influence of the price of cryptocurrency on NFTs We investigate whether the volatility extends to NFT markets. In order to further strengthen our research, we will also examine the possibility of co-movement between cryptocurrency prices and NFT returns, since co-movement has been proven to be a significant characteristic of cryptocurrency markets. The identification of connections between these two types of markets could prove beneficial for both practitioners and researchers alike, as we can look at trends in the pricing of cryptocurrency to help us understand the trends likely to occur for NFT markets.
Our study is a contribution to the emerging NFT pricing research. One study only looked at prices of the NFT market. This study has shown the case of one NFT market pricing patterns don’t display signs of efficiency in the basic sense however there are emerging indicators of changes in the way that pricing is conducted. Due to the variety of NFT markets Our study adds value to Dowling 2021 on a very basic level through being an additional study in this area , and also by expanding the tests to 3 NFT market (two market that are not yet established). Our primary contribution is to demonstrate how NFT pricing is related to the market price of cryptocurrency. We have found a very limited level of transmission and strong evidence of co-movement. This provides an understanding of the way NFT pricing could change as market matures. The research at a more general scale helps in understanding of the way pricing behavior develops in markets that are new ( Khuntia and Pattanayak (2018)).
In the next section , we look at the data and methodological approach. The following section contains the results and analysis. Then, we wrap up the research.
Our data set starts with data from the two most important crypto markets, Bitcoin Ether and Bitcoin. We then combine the raw data from coinmarketcap.com. The reason we picked these two currencies is the connection that exists with Ether and NFTs, since NFTs are, as of today mostly associated with Ethereum smart contracts and payments is usually made using Ether. Bitcoin is chosen because it has the biggest dimension and also the biggest transmission of volatility to other currencies.
Our NFT data comes from secondary market transactions in the following categories: Decentraland LAND tokens, CryptoPunk images and Axie The Infinity characters. The individual trade data comes through nonfungible.com and we then aggregate from the trade data into our time window. We picked Decentraland LAND which is an imaginary land NFT that is part of the Decentraland virtual world for comparison with data from Dowling in 2021 and because it is the biggest virtual world and the fourth-largest NFT market in general. We picked CryptoPunk because it is the biggest NFT market, which is the first NFT market. It is also is a little like a representative market of (quite vast) NFT art and collectible market. We selected Axie Infinity as a market with a high volume of transactions in comparison to the two other markets since it’s representative from NFT gaming market, the NFT gaming market, as well as the eighth largest NFT market in total dollars traded.
Prices are listed in USD equivalents, and the returns calculated are on the basis of a weekly basis because of an excessive variance in daily returns information, since trading in a few of the NFTs is extremely restricted in the initial times. There are 4,936 transactions of Decentraland LAND and 7,578 trades in CryptoPunks as well as 95,272 trades in the case of Axie Infinity characters during the period of. There are three distinct prices for the three NFT markets. There is also Axie Infinity characters costing $61 as the average price, Decentraland with $1,109 and CryptoPunks as the most expensive market, with the average price of $4,000.