The Disposition Effect in the NFT Market

Abstract

We document a sizeable disposition effect in the market for non-fungible tokens (NFTs). Using a comprehensive transaction dataset from OpenSea, we show that NFT holders systematically realize gains prematurely while holding onto losses, mirroring behavior documented in traditional equity markets. Consistent with a high participation rate of retail investors and the lack of clear fundamental values, the effect is significantly more severe than in equity markets. We further find that the magnitude of the disposition effect attenuates in December, consistent with end-of-year tax-loss harvesting incentives, suggesting that on-chain transactions can be monitored by tax authorities. Finally, to address the NFT market's episodic illiquidity, we introduce a novel measure of the disposition effect based on the time-to-sale of listed assets. Our findings extend behavioral finance theory to digital-asset markets and provide new tools for studying the disposition effect in illiquid trading environments.