The dependence of NFTS on the stock market and their place in an asset portfolio

Abstract

In 2022, Lennart Ante found that the fluctuations within NFT markets can affect other NFTs. In his words, the success or adoption of younger NFT projects is influenced by that of more established markets, emphasizing the need for deeper analysis. This paper aims to explore the potential relationship between traditional markets and the NFT market and to understand the correlation between the cryptocurrency market and NFTs. To achieve this, we profile the typical NFT enthusiast, construct a model portfolio, and perform a financial analysis benchmarked against the S&P 500, Bitcoin, and Ethereum. Our research ranges from 2018 to 2023, capturing the monthly returns of different assets to assess the diversification potential of introducing NFTs into a portfolio. These NFT projects, including Bored Ape Yacht Club, Mutant Ape Yacht Club, Pudgy Penguins, Doodles, Azuki, CloneX, Bored Ape Kennel Club, Cool Cats, CryptoPunks, illustrate low significance within multiple linear regression. However, when correlated with the cryptocurrency market, the aggregated NFT portfolio showed better significance, revealing meaningful relationships. In contrast, traditional financial markets did not yield any significant results in our analysis. In the end, this paper intends to draw a comparative analysis between the risk-return profiles of traditional financial markets, the cryptocurrency market, and the selected NFTs. By doing so, we identified NFTs as potential assets for diversifying a portfolio.