NFTs: Important Preliminary Risk and Return Analysis

NFTs are taking the cryptocurrency trading world by storm. Same as for the other blockchain-related projects, the critics are easy to find, so a research paper with hard data concerning the NFTs can be of great importance. The research paper by Mazur (2021) studies the NFT startups traded in the crypto markets.

So what about the results? The NFTs are similar to the IPOs, earning a high first-day return with abnormally high volume. However, contrary to the IPOs, the subsequent long-term return is not negative but positive. As expected, the high returns also come with a high risk, measured by the volatility. Despite that, NFTs have a low correlation with S&P 500 and a positive Bitcoin CAPM alpha. But we advocate extreme caution because this data analysis is based on a short time period, and we all know that cryptocurrency markets are prone to crash at precisely the same time as the broad stock market. Plus, the skewness of this market is also extreme — one outlier (Axie Infinity Shards) drives the whole outperformance of NFTs against Bitcoin’s benchmark price index.

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