(The) impact of cryptocurrency fluctuations on price of non-fungible tokens

Abstract

Non-fungible tokens (NFTs) have drawn massive attention from creators and collectors to companies outside the art and media industries. Despite rapidly growing marketplaces and business applications, however, it is not much known about the complex dynamics that play out underneath – how sellers and buyers trade NFTs and how their prices are formed in online marketplaces. It is not only because the concept of NFTs is new but also because the extreme fluctuations of cryptocurrencies used for payment complicate the evaluation of historical prices and the prediction of future prices for NFT traders. The endogenous choice between volatile cryptocurrencies and stablecoins for payment further add complexity to characterizing the strategic decisions of NFT traders. In this study, I collected granular data on NFT transactions from OpenSea, the first and largest NFT marketplace, to investigate whether and how ETH fluctuations are related to the listing price set by sellers and the selling price taken by buyers of NFTs listed in ETH or stablecoins. Panel regression analyses on repeatedly sold NFTs show that sellers who chose ETH set the listing price much higher (or lower) than they purchased when ETH appreciated (or depreciated). And once listed in ETH, buyers paid a much higher (or lower) price when ETH was stronger. On the other hand, a minority of sellers who chose stablecoins tended to overprice, regardless of ETH fluctuations. On the contrary to the conventional wisdom, after listing, no evidence is found that stablecoins are an effective hedging instrument against ETH fluctuations. This study is one of the first to inspect NFT pricing with pricing steps. In addition, the results extend the literature on denomination and anchoring effects by examining the effect when using highly volatile currencies in the multi-currency market.