Bubbles in NFT markets: correlated with cryptocurrencies or sentiment indexes?

Abstract

This paper analyzes asset bubbles in the non-fungible token (NFT) and cryptocurrency markets, and assesses the impact of cryptocurrency prices and market sentiment on NFT bubble formation. We employ the Generalized Unit Root Test (GSADF test) to examine price bubbles across the NFT market, including sub-markets and related projects, as well as seven major cryptocurrencies. Our research identifies cryptocurrency bubbles in three distinct periods, with deflation observed in 2022. We establish a strong positive correlation between NFTs and most cryptocurrencies in terms of bubble dynamics. Notably, market sentiment indicators have varying effects on NFT bubbles; the VIX index has a positive impact, while the GEPU index and Google Trends data have negative effects. These findings provide valuable insights for regulators and investors into NFT bubble dynamics, cryptocurrency price behaviour, and market sentiment, facilitating informed decision-making.