Buying Beauty? On Rarity and Returns in Non-Fungible Tokens

Abstract

We investigate the correlation between rarity and returns on investments in digital art in the form of non-fungible tokens (NFT) across three major comparable collections. Methodologically, we first quantify the “shadow” price of both individual rarity scores and aggregate market activity through the lens of an hedonic regression analysis which corrects for time-varying dispersion in prices. In addition, we delve into the cross sectional distribution of the returns across NFTs clustered by rarity scores and number of sales. The results point towards a positive (negative) correlation between the average performance and rarity (number of sales). Yet, the average performance is primarily due to outlying returns and is substantially lower when focusing on transactions on the secondary market.