Nansen Research: Cross-Crypto Bull-Bear NFTs Also Have Market Sentiment Indicators?

We assess the cycle phases of cryptoassets and explore the price action of specific NFTs based on the sentiment of market participants

Common Token (Fungible Token) Cycle: Nansen analyzed investor sentiment and macroeconomic indicators, summarizing the following:

  • In May 2022, investor sentiment turned to “panic,” marking the beginning of a long-term consolidation in cryptocurrency prices (see Figure 1)
  • In order for cryptocurrency prices to exit the consolidation phase and bottom out, fundamental uncertainty must be reduced
  • The main scenario for this is that the Fed is more focused on unemployment than inflation.
  • Real growth is slowing sharply, which means it’s getting closer.
  • Historical analysis suggests that the Fed is more likely to pause monetary tightening until the first quarter of 2023 (see Figure 6)

NFT (Fungible Token) Cycle: The correlation between NFT and ordinary tokens is weaker than that between ordinary tokens. Nansen has developed an NFT market-specific investor sentiment indicator based on two on-chain indicators:

  • Realized volatility tracking NFT prices: higher realized volatility -> higher forward weekly returns
  • Trading volume of blue chip NFTs to sales of all NFTs: higher ratio -> lower forward weekly returns (see Figure 21 for backtesting)

summary

Our recent analysis of the cryptoasset market revealed four insights:

1) Investor sentiment turned to extreme panic in May, which translated into accelerated allocations to stablecoins (especially USDC ) and investments in various digital asset (and non-digital) “safe havens”. In our opinion, this has led to a correction in the price of common tokens, which the market needs more time to digest.

2) The current macroeconomic cycle is transitioning from stagflation, such as slowing real growth and rising inflation, leading to a sharp deterioration in real growth and high inflation. The weaker real growth, the more likely the Fed will delay further rate hikes and tightening (“Fed Puts ). When this probability reaches a sufficient threshold, it may support the cryptocurrency market.

3) Based on the macro indicators reviewed in our filing, we are close (estimated Q4 2022 – Q1 2023) but not quite at the support stage yet.

4) The pause in this favorable monetary tightening is likely to be shorter than in past cycles as we believe that there is a significant increase in the Inflation is likely to re-accelerate after a recession, driven by years of spending for a generation.

Extending our analysis to the NFT (non-fungible token) market, our analysis shows that NFT prices tend to be driven by the following metrics: 1) NFT tracking price volatility and 2) trading volume of more mature NFT holdings The ratio of all traded volumes. Finally, we caution that given the small sample of data available (slightly less than a year of weekly transaction data), there are limitations in the interpretation of statistical relationships observed around specific NFTs. Inclusion of more out-of-sample real-time data in future studies will help to validate the robustness of our findings.

1. Macro Outlook of Crypto Assets

1.1 Risk Appetite Indicators for Stablecoins

The Nansen Stablecoin Risk Appetite Indicator measures crypto investor sentiment by measuring the relative allocation of stablecoins to the total dollar balance of wallets of “smart money” (see Figure 1). In May 2022, the rate skyrocketed, and at the time of writing, it was around 16%, above our “panic threshold” of 11% (see this article for more details).

It is understandable that sentiment and prices have deteriorated in the wake of the respective decoupling events of UST and sETH (see Nansen’s report on the UST decoupling event) and the unraveling of leveraged investment schemes across liquidity pools and other DeFi protocols. Investors are heightening concerns as cryptocurrency prices correct, according to a stablecoin risk appetite indicator . A dip in the metric below the 11% threshold would trigger a risk signal, the same as waning pessimism among Smart Money investors.

Nansen Research: Crossing Crypto Bulls and Bears, NFTs Also Have Market Sentiment Indicators?

Figure 1: Stablecoin Risk Appetite Indicator

Source: Nansen Query

1.2 Shift to rapidly deteriorating real growth and high inflation

Sentiment alone is not enough to call for a contrarian “bottom” in cryptoasset prices. Sentiment is likely to remain subdued as long as the fundamental drivers behind asset prices remain negative. This is the difference between investors’ perception of risk and the actual underlying fundamental uncertainty (see Section 3.1 for details).

Historically, high inflation and a volatile macro environment have not been favorable for risk assets (and crypto assets are no exception), as it forces higher discount rates even if real demand deteriorates (lower top line).

The macro momentum has been evolving over the past few weeks. The slowdown in growth was more pronounced, and the momentum in the data was negative (eg, the number of negative surprises rose compared to market expectations).This is especially evident in declining business and consumer surveys around the world. The Purchasing Managers’ Index (PMI) survey, a leading indicator of the industrial and ultimately macro cycle, is heading for contraction (see Figure 2).Meanwhile, companies around the world are reporting: a) restocking, b) falling new orders, and c) stabilizing price pressure (as of June only in some industries). Demand-driven inflation is likely to normalize as consumers choose to scale back spending in response to higher prices, and as manufacturing supply chains normalize. However, inflation is nowhere near the Fed’s 2% target, and drivers unrelated to demand, such as geopolitics and a technical lag in the rent component of the U.S. CPI mix, mean inflation, even if it slows, is unlikely to return to the Fed’s target.

Nansen Research: Crossing Crypto Bulls and Bears, NFTs Also Have Market Sentiment Indicators?

Figure 2: G4 (US, Eurozone, Japan, UK) Manufacturing PMI New Orders, June 2022

Source: Markit, S&PGlobal

Then we turn to the Fed’s second mission besides “stabilizing prices,” which is “maximum employment.” The U.S. labor market is very tight by various indicators, but the momentum here is also negative. For example, the Kansas City labor market momentum indicator tends to contract before the macroeconomic slowdown approaches zero (see Figure 3).

Nansen Research: Crossing Crypto Bulls and Bears, NFTs Also Have Market Sentiment Indicators?

Figure 3: Kansas City Fed Labor Market Momentum Indicators and Historical Recessions

Source: St-Louis Fed and Kansas City Fed

For now, the Fed is prioritizing its inflation mandate, with the Fed chairman even implicitly acknowledging the high likelihood of a looming recession in recent Senate testimony: “[A soft landing] is our goal, and it’s going to be very challenging… … the question of whether we can do that will depend to some extent on factors beyond our control.”

1.3 Waiting for the “Fed Put”

We expect the U.S. labor market to deteriorate sharply between the third quarter of 2022 and the second quarter of 2023, and transition from an area of ​​uncertainty to a major focus for the Fed (see Figure 4).

Nansen Research: Crossing Crypto Bulls and Bears, NFTs Also Have Market Sentiment Indicators?

Nansen Research: Crossing Crypto Bulls and Bears, NFTs Also Have Market Sentiment Indicators?

Figure 4: Summary of economic forecasts from the Fed’s June 2022 meeting

Source: Fed economic projections June 2022

We attempted to use the most reliable recession predictor, the U.S. Treasury yield curve, to measure the time horizon estimates for Fed activation (see Figure 5). Based on our historical analysis, the lead time between an inverted yield curve (we use US 10-year to 2-year maturities here) and the first policy rate cut is about 7 months (on average). This would translate into a greater likelihood of a rate cut, or, more likely, a moratorium on monetary tightening until the first quarter of 2023, followed by a recession by the third quarter of 2023 (with an average lead of 16 months). We note that lead times are widely distributed, with the maximum or latest date for a Fed pause estimated to be in the first quarter of 2024 (22 months). The riskiest assets that are most sensitive to interest rates, such as crypto-assets, may preempt the “Fed put”.

That said, we would like to zoom in on the 1970s to early 1980s portion of Figure 5, in which the US experienced multiple alternating yield curve inversions and re-steepening events. Coincidentally, this is a period of high inflation and volatility.We suspect that 2023 and the years beyond will bear some resemblance to the 1970s, as the Fed will have to alternately focus on inflation and unemployment for a very short period of time.

Nansen Research: Crossing Crypto Bulls and Bears, NFTs Also Have Market Sentiment Indicators?

Figure 5: U.S. Treasury 10- to 2-Year Yield vs. Federal Funds Reserve Ratio

Source: St-Louis Fed, Nansen analysis

Nansen Research: Crossing Crypto Bulls and Bears, NFTs Also Have Market Sentiment Indicators?

Figure 6: Historical time distribution between yield curve inversion and first Fed policy rate cut/recession

Source: St-Louis Fed, Nansen analysis

1.4 Crypto Market Cycle Indicators

We summarize macro inputs, namely the steepness of the U.S. sovereign yield curve, and the growth rate of G4 central bank balance sheets, and the on-chain valuation of cryptocurrency realized market capitalization versus market capitalization in the cyclical indicator shown in the graph 7. This indicator The last switch to safe-haven was in February 2021, and it has not yet been switched to safe-haven. We back-tested the indicator (effective from December 2021) and presented the results in Figure 8. This graph shows the return index signals for risk-taking (100% invested in BTC ) and risk averse (100% invested in USDC) cyclical strategies.

Nansen Research: Crossing Crypto Bulls and Bears, NFTs Also Have Market Sentiment Indicators?

Figure 7: Nansen Crypto Cycle Indicator (1=risk-on, 0=risk-off)

Source: Nansen analysis

Nansen Research: Crossing Crypto Bulls and Bears, NFTs Also Have Market Sentiment Indicators?

Figure 8: Nansen Crypto Cyclical Indicator Backtest for BTC/USDC 100%/0% Strategy

Source: Nansen analysis

1.5 NFT market cycle

When it comes to the NFT market, we observe a similar risk aversion in the market. Since the peak in January, both the monthly NFT volume and the number of transactions have declined (see Figures 9 and 10).

Nansen Research: Crossing Crypto Bulls and Bears, NFTs Also Have Market Sentiment Indicators?

Figure 9: NFT monthly transaction volume on Ethereum

Source: Nansen dashboards

Nansen Research: Crossing Crypto Bulls and Bears, NFTs Also Have Market Sentiment Indicators?

Figure 10: Monthly NFT Transactions on Ethereum

Source: Nansen dashboards

However, in June, the Nansen NFT-500 index, along with the Blue Chip-10, Social-100, Art-20 and Metaverse -20 indices, all showed a small reversal trend (see Figure 11). It is worth noting that the Art-20 Index had the largest gain at +32.6%; from 739 at the beginning of June to 980 at the end of the month.

A careful analysis of NFT buyer trends shows that in June, we saw first-time buyers and repeat buyers slowly enter the market again (see Figure 12). Given that previous correlation analyses suggested that correlations between NFTs and mainstream cryptoassets were lower than those between common tokens, this finding prompted us to explore NFT-specific statistics and assess whether and how they predate NFT prices develop.

Nansen Research: Crossing Crypto Bulls and Bears, NFTs Also Have Market Sentiment Indicators?

Figure 11: Nansen NFT Index

Source: Nansen dashboards

Nansen Research: Crossing Crypto Bulls and Bears, NFTs Also Have Market Sentiment Indicators?

Figure 12: Number of daily buyers of NFTs on Ethereum

Source: Nansen dashboards

2. The Generation Gap of Sentiment Indicators for Investors in the NFT Market

While relying on several micro and macro financial indicators when pricing traditional financial assets, the nascent nature of NFTs and the broad crypto market means that few or limited reliable market indicators can help determine asset valuations and market sentiment. While lacking reliable indicators, NFT market sentiment has also been driven by investor speculation (see Gunay & Muhammed, 2022 for details).

Unlike cryptoassets like Bitcoin or Ethereum, NFTs are non-fungible, meaning each token is uniquely identifiable, holds a different value, and represents a unique instrument. The unique and irreplaceable nature of NFTs introduces new ways of adopting and implementing blockchain technology for a variety of applications.

Although the scarcity dimension of NFTs has been debated (Chohan, 2021), innovative approaches to exploit the properties of NFTs are emerging. For example, NFTs are used to record and represent art collections (Kugler, 2021). Other notable applications include assignment of rights to other (digital) assets (Wilson, Karg & Ghaderi, 2021), land and asset ownership in the Metaverse, Internet of Things (IoT) implementation (Arcenegui, Arjona & Baturone, 2021), peer-to-peer Energy trading (Karandikar, Chakravorty and Rong, 2021), and even wildlife protection (Mofokeng and Fatima, 2018).Additionally, our previous NFT Index methodology, which analyzed a collection of more than 500 NFTs in the paper, allowed us to identify four major categories of NFTs – Art, Social, Gaming, and Metaverse. A key observation of this analysis is that NFT assets have multiple use cases and can be classified into multiple NFT categories.

Given that traditional valuation models do not necessarily apply to crypto assets, the focus has shifted to exploring investor sentiment to navigate this market. Furthermore, existing literature suggests that cryptoasset markets are inefficient and do not meet the efficient market hypothesis (Anamika, Chakraborty, and Subramaniam, 2021). Therefore, this paper is an early attempt to investigate the role of investor sentiment in determining the price action of NFTs. This article focuses on NFTs as an asset class (which will be referred to later as the “NFT marketplace”) rather than a collection of NFTs for individual assets. Our main goal is to identify proxies for investor sentiment that can explain NFT price behavior. Investor sentiment proxies selected for this analysis include models such as regressions of price against past realized volatility, as well as quantitative metrics that measure volume, sales velocity and even the appearance of social media “NFT” searches.

Section III below provides an overview of our approach, while Section IV reports the results of our empirical analysis.Empirically conducted primarily through context-dependent causal analysis, we estimate a general least squares regression model to assess the dependence of NFT returns on various NFT-specific “sentiment” variables over the observation period.We employ a baseline NFT market index consisting of a collection of eight NFTs. The index is designed to represent overall market behavior and has the advantage of data availability as of early 2021. Once the price action of a basket of NFTs was determined, we tested it against the effects of a proxy for NFT investor sentiment. Finally, Section V details the implications of our NFT investor sentiment indicator.

3. Methodology and data

3.1 Traditional Finance: Defining Risk Appetite Indicators

In traditional finance, the “risk appetite” indicator helps to assess the likelihood of market peaks and troughs (Reference: Illing & Meyer, 2004). Risk appetite includes investors’ risk perception of asset price uncertainty, as well as the level of uncertainty surrounding asset price fundamentals themselves. None of these components are directly observable, but the latter are usually not too difficult to estimate.

Figure 13 below provides a brief summary of the modeled and unmodeled quantitative factors used to estimate risk appetite for traditional financial assets. Models typically involve regression of returns on past volatility across multiple asset classes. Non-modeling factors measure investor preference for safe assets, the cost of “protecting” through derivatives, liquidity and volume growth, and social media sentiment indicators.

Nansen Research: Crossing Crypto Bulls and Bears, NFTs Also Have Market Sentiment Indicators?

Figure 13: Overview of factors and models applied to estimate risk appetite for traditional financial assets

We use the above framework to generate on-chain metrics designed to approximate the risk appetite of NFT investors.

3.2 Candidate indicators of risk appetite for NFTs: choosing “independent” variables

Nansen Research: Crossing Crypto Bulls and Bears, NFTs Also Have Market Sentiment Indicators?

Figure 14: Overview of factors and models tested to measure NFT risk appetite

The NFT metrics listed above are primarily generated using statistics from on-chain NFT sales, prices, volumes, from/to wallet addresses, with the exception of Google search metrics:

  • Blue Chip NFTs vs All/NFT-500 Large Cap NFT Prices, and Blue Chip NFTs vs All/NFT-500 NFTs Trading Volume: These metrics measure investor preference for perceived “safer” assets, such as blue chip NFTs in the NFT market dominance
  • Active wallets: There is an argument to consider the network effects of cryptoassets when evaluating NFTs (Cornell University, 2021). We believe that by measuring wallet activity, we can understand the interest of network participants in the NFT market.
  • Buy-to-sell ratio of active wallets: This metric measures the demand for NFTs by wallets.
  • Ratio of NFT collectibles with new highs in price or transaction volume or number of wallets to new lows in the past four weeks / Ratio of collectibles with higher than four-week average price or transaction volume or number of wallets to collections with lower than average: measure price or Momentum Indicator for Quantity Strength

All metrics are aggregated in three subsets:

  • All transactions on the Ethereum network
  • Volume filtered for portfolios belonging to the Nansen NFT-500 Index (see definition in Section 3.3 below)
  • Trading volume filtered for combinations belonging to the baseline NFT basket index (see definitions in Section 3.3 below)

3.3 Picking the “dependent” variable of NFT price

I. Nansen NFT-500 Index

The NFT-500 is a broad market index that tracks the market activity of NFTs issued on the Ethereum blockchain (ERC-721 and ERC-1155). The index was launched on January 1, 2022. The benchmark index consists of a collection of no more than 500 NFT projects, weighted by market capitalization. The index is designed to track activity and movements in the NFT market. The benchmark index is calculated daily and rebalanced every 30 days, and the index constituents are reassessed and rebalanced accordingly. For an NFT to be included in the index, one needs to satisfy:

a) Secured on a blockchain-based blockchain using smart contracts (at this stage, the Nansen index tracks only those issued on Ethereum);

b) have completed at least 100 transactions in the past 90 days, half of which are unique wallet addresses, and

c) At least 1000 ETH trading volume if the trading volume of the NFT collection is freely traded in the past 90 days and the collection has no or no undue risk of foreseeable liquidity shocks

Given that the NFT-500 index rebalances every 30 days, not all constituent stock price data can be backfilled during the observation period of this study. Therefore, for the purpose of this study, we constructed a baseline NFT market index.

II. Benchmarks for the NFT Basket Index

Unlike previous studies examining NFT investor sentiment, we use on-chain sales data of actual NFTs to determine the value of a basket of NFTs. We selected 8 NFT portfolios that represent the NFT market, focusing on NFT portfolios that have demonstrated a lifespan of more than 12 months. These NFTs are: Bored Ape Yacht Club, Crypto Punks, Chrome Squiggle, VeeFriends, Meebits, Autoglyths, Cool Cates, and CyberKongz Genesis. We then use the 7-day pattern price for each set and arrive at the “Baseline NFT Basket Index” by equally weighting the allocation to each project side at the beginning of the testing period (July 2021). Figure 15 shows the constructed Baseline NFT basket price index in ETH and USD.

Nansen Research: Crossing Crypto Bulls and Bears, NFTs Also Have Market Sentiment Indicators?

Figure 15: Benchmarks of NFT Portfolio Price Indices

Source: Nansen Query, Nansen analysis

Nansen Research: Crossing Crypto Bulls and Bears, NFTs Also Have Market Sentiment Indicators?

Figure 16: Correlation between indices (USD and ETH) for ETH/USD, BTC/USD, NFT combined price benchmarks (July 2021 to June 2022)

Source: Nansen Query, Nansen analysis

We observed some correlation between the benchmark NFT composite price index and the price of the homogeneous token, albeit weaker than the price of the intermediate homogeneous token (see Figure 16).

4. Findings and Interpretation

Using the benchmark of the 7-day USD price return of our constructed NFT portfolio index as the dependent variable, we performed a multivariate generalized least squares regression on the NFT indicator introduced in Section 3.2.

For each indicator, we created a lagged time series as an independent variable. We ensured that all variables were fixed and performed a one-to-one visual inspection through our dependent variable graph (see Figure 17).

Nansen Research: Crossing Crypto Bulls and Bears, NFTs Also Have Market Sentiment Indicators?

Nansen Research: Crossing Crypto Bulls and Bears, NFTs Also Have Market Sentiment Indicators?

Nansen Research: Crossing Crypto Bulls and Bears, NFTs Also Have Market Sentiment Indicators?

Figure 17: Benchmark and Tested Dependent Variable Samples for NFT Portfolio Price Returns

Source: Nansen Query, Nansen analysis

After controlling for statistical bias, we found two variables with relatively high predictive power in the sample ( see Figure):

  • Tracks the realized volatility of the benchmark NFT portfolio price: a positive correlation coefficient means that higher realized volatility predicts higher forward weekly returns
  • Blue-chip NFT trading volume and all NFT trading volume: The correlation coefficient is negative, which means that the relatively higher the blue-chip NFT sales volume, the lower the forward weekly return. This is intuitive, as investors tend to “get out of their pockets”

Nansen Research: Crossing Crypto Bulls and Bears, NFTs Also Have Market Sentiment Indicators?

Figure 18: NFT Portfolio Price Return Benchmark, Based on GLS Regression Results vs. Actual Price Volatility and Ratio of Blue Chip Transaction Value to All Transaction Value (“In-Sample”, August 2021 to January 2022)

Source: Nansen analysis

To test our out-of-sample regression results (January 2022 to June 2022), we simulated a strategy that invests in a benchmark of NFT portfolio prices when our investment signal is positive, and when it is negative is neutral (cash). We’ve opted for a weekly review of Signals. We generate investment signals using the coefficients found in the sample, applied to two time series of realized volatility and blue-chip to all sales.

The results are illustrated visually in Figures 19 and 21, and the statistical results are illustrated in Figures 20 and 22.Compared to investing only in the NFT price index, following the investment signal generated a better total return than simply investing in the NFT price index, while the decline was smaller.

Nansen Research: Crossing Crypto Bulls and Bears, NFTs Also Have Market Sentiment Indicators?

Figure 19: Benchmark NFT Portfolio Price Index without Contingent Investment Signal Overlay (“Out-of-Sample”, Jan-June 2022)

Source: Nansen analysis

Nansen Research: Crossing Crypto Bulls and Bears, NFTs Also Have Market Sentiment Indicators?

Figure 20: Benchmark NFT Portfolio Price Index without Contingent Investment Signal Overlay (“Out-of-Sample”, Jan-June 2022): Risk and Reward

Source: Nansen analysis

Nansen Research: Crossing Crypto Bulls and Bears, NFTs Also Have Market Sentiment Indicators?

Figure 21: Benchmark NFT Portfolio Price Index without Contingent Investment Signal Overlay (“Full Sample” July 2021-June 2022)

Source: Nansen analysis

Nansen Research: Crossing Crypto Bulls and Bears, NFTs Also Have Market Sentiment Indicators?

Figure 22: Benchmark NFT Portfolio Price Index, No Contingent Investment Signal Overlay (“Full Sample” July 2021-June 2022): Risk and Return

Source: Nansen analysis

5. Limitations and Conclusions

While still in high gear, it is important to understand the price behavior of NFTs as an asset class whose market sentiment may differ from fungible cryptoassets. In this article, we explore the potential of NFTs to present unique opportunities in the broad cryptoasset market and examine their price action against the sentiment of market participants.

We found relatively high NFT price predictions for two on-chain metrics: trailing realized volatility for NFT composite price benchmarks and volume for blue-chip NFTs versus all NFTs. Volatility has traditionally been a good measure of investor risk appetite, and the shift from blue-chip NFTs to small-cap NFTs may indicate that investors are willing to take risk to get more returns (i.e., investor greed, so to speak). indicator) and vice versa, because of fear). Based on these two indicators and our regression coefficients, we created a “Fear and Greed” sentiment indicator to track the NFT market.

More real-time data points should help validate the metric’s robustness as we go through at least one full NFT “cycle”. In fact, the out-of-sample data used was only captured for a few months. Our forward horizon is also limited to one-week forecast NFT price returns, and with more data, we aim to increase this timeframe to help capture larger “peaks and valleys”.

Sentiment indicators are also valuable for traditional tokens: the Nansen stablecoin preference indicator marks a price consolidation that started in May.

Sentiment must be complemented by fundamental indicators to gain a deeper understanding of asset cycles. Our key macro conclusion is that we are entering a sharp slowdown in real global growth, which could prompt policymakers to pause monetary policy tightening until the first quarter of next year, which could lead to a pre-emptive rally in cryptocurrency prices.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/nansen-research-cross-crypto-bull-bear-nfts-also-have-market-sentiment-indicators/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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