Pricing Dynamics and Herding Behavior of NFTs

Non-fungible tokens (NFTs) took the digital art space by storm in 2021, generating massive amounts of volume and attracting a large number of users to a previously obscure part of blockchain technology. Still, very little is known about the determinants that contribute to NFT pricing and the market dynamics. This paper attempts to evaluate these factors analyzing 860,067 art NFTs that have been deployed on the Ethereum blockchain and have been involved in 317,950 sales. We introduce a first-of-its-kind ranking system for NFT artists, adding a novel dimension to our analysis. Our results suggest that market liquidity and intrinsic value strongly predict average price of NFTs. Contrarily, social media activity surprisingly shows a negative association with NFT prices. We also uncover the dominance of a small group of artists, demonstrating the pronounced 'superstar effect' and herding behavior within the NFT market. This market dynamic, however, shows signs of shifting towards independent decision-making during extreme market volatility.