Exploring the non-fungible token bubble: Real earnings for investors

Non-fungible tokens (NFTs) have taken the digital world by storm, with investors seeing substantial returns on these unique assets. However, a closer look at the data reveals that the apparent returns may not tell the whole story. The rise and fall of NFT prices have left many wondering what investors actually earned from these tokens.

Researchers have long recognized that observed transaction prices in illiquid asset markets can be misleading. This is especially true for markets like housing, art, venture capital, and private equity. In the case of NFTs, the returns seen are conditioned on a sale occurring, and sellers tend to avoid realizing losses, a phenomenon known as the disposition effect. This behavioral bias, first documented in the 1980s, has significant consequences in markets where assets are unique and trading is infrequent.

Recent studies have shed light on the economics of the NFT market and the factors driving its extreme return characteristics. Cryptocurrency-specific factors like momentum and investor attention have been shown to strongly predict performance. However, the fundamental issue remains in accurately measuring NFT investment performance due to the disposition effect and the selection bias it introduces. Correcting for this bias can significantly change the apparent returns on investments in unique assets like NFTs.

In a recent paper, researchers examined data from two major NFT platforms – SuperRare and OpenSea – to understand the actual returns earned by investors in NFTs. SuperRare, a curated marketplace, provided data on nearly 100,000 unique digital artworks created between 2018 and 2024, while OpenSea, the largest uncurated marketplace, recorded over 9 million art NFT sales. The blockchain records from these platforms allowed researchers to track every detail of transactions with unparalleled completeness.

The numbers revealed a stark reality. While the median return on resold NFTs on SuperRare was 170% in dollar terms, the repeat-sales price index, a standard measure of returns for unique assets, peaked at 490 times its initial level in October 2021. On the surface, this would suggest that NFTs were a once-in-a-lifetime investment opportunity. However, only 6.2% of NFTs on SuperRare were ever resold, indicating that the actual returns experienced by investors may not be as lucrative as the headline numbers suggest.

The study also highlighted the impact of the disposition effect on NFT investments, with investors more likely to hold onto losing assets and sell winning ones. By taking into account this bias and the low resale rates of NFTs, researchers were able to paint a more accurate picture of investor earnings in the NFT market. While the price rise of NFTs was indeed extraordinary, it was primarily driven by a small number of extreme winners, rather than widespread investor success.

Overall, the study shows that the NFT market, like many other illiquid asset markets, is subject to biases and statistical illusions that can distort the true returns earned by investors. As regulators and market participants continue to navigate the complexities of digital assets, understanding the underlying economics of NFT investments will be crucial in ensuring informed decision-making and sustainable market growth.