Alternative Investments in the Fintech Era: The Risk and Return of Non-fungible Token (NFT)

45 Pages Posted: 1 Sep 2021 Last revised: 18 Oct 2021

See all articles by De-Rong Kong

De-Rong Kong

National Taiwan University - Department of Finance

Tse-Chun Lin

The University of Hong Kong - Faculty of Business and Economics

Date Written: August 30, 2021

Abstract

We utilize one of the earliest and largest NFT collections to investigate the pricing and the risk-return profile of NFTs. In general, we find that NFTs have higher returns than traditional financial assets. Yet, investing in NFTs comes along with extremely high volatility. The average monthly returns on NFTs range from 6.10% to 44.11%. But their standard deviations fluctuate between 44.35% and 74.57%, leading to a Sharpe ratio comparable to the NASDAQ index. NFT prices surge when there is a drastic increase in demand for alternative investments and a search for yield, especially in a low interest rate environment. We also find that the pricing of NFT largely depends on a token’s scarceness and an investor’s aesthetic preference. Hence, conventional asset-pricing models are unlikely to explain NFT returns. Overall, we provide the first comprehensive analysis that NFTs serve as a novel investment vessel in this Fintech era.

Keywords: Non-Fungible Tokens, NFT, Fintech, Ethereum, Blockchain, Alternative investments, Risk and return

JEL Classification: C43, D44, G11, G12, Z11

Suggested Citation

Kong, De-Rong and Lin, Tse-Chun, Alternative Investments in the Fintech Era: The Risk and Return of Non-fungible Token (NFT) (August 30, 2021). Available at SSRN: https://ssrn.com/abstract=3914085 or http://dx.doi.org/10.2139/ssrn.3914085

De-Rong Kong (Contact Author)

National Taiwan University - Department of Finance ( email )

1, Sec. 4, Roosevelt Road
Taipei, 106
Taiwan

Tse-Chun Lin

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

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