VIETNAM NATIONAL UNIVERSITY UNIVERSITY OF ECONOMICS & BUSINESS FACULTY OF FINANCE - BANKING GRADUATION THESIS EXPLORING THE BUBBLE BETWEEN NFT STOCKS AND DEFI ASSETS Ha Noi, 2023 ACKNOWLEDGMENT During my research and implementation of this Thesis topic, I have been fortunate to receive enthusiastic assistance and valuable encouragement. With utmost respect and gratitude, I extend our sincere thanks to the teachers and experts from the Faculty of Finance and Banking for generously devoting their time to address and analyze my questions, these contributions have been instrumental in providing me with a solid foundation and confidence in doing this study. I would like to express my deepest gratitude to Dr. Le Hong Thai, a lecturer from the Faculty of Finance and Banking, who directly guided me throughout this thesis.
He is a very dedicated and enthusiastic teacher with new directions, detailed communication, frank suggestions, and especially he always wants to show me the greatest value I receive after completing my research. I consider myself extremely fortunate to have his support. Due to the limited knowledge and time, the study cannot avoid its shortcomings and errors. We earnestly hope to receive feedback from teachers and readers to enhance the completeness of the study.
Once again, we extend our thanks and wish everyone good health, happiness, and success. Best regards, TABLE OF CONTENTS CHAPTER 1: [INTRODUCCTTOÌN. Scope of Content. Scope Of time.
Expected research Contributions. 3 CHAPTER 2: THEORETICAL BASIS AND LITERATURE REVIEW. Overview Of NI Ï. ch Tho Tho TH TH HH TH nghệ 4 2.
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Họ TH HT II 1000090 50 LIST OF ACRONYMS DeFi Decentralized Finance NFTs Non-Fungible Tokens PSY Phillips - Shi - Yu ADF Augmented Dickey-Fuller SADF Supremum Augmented Dickey-Fuller GSADF Generalized Supremum Augmented Dickey-Fuller MANA Decentraland ICP Internet Computer AVAX Avalanche LINK Chainlink GARCH Generalized AutoRegressive Conditional Heteroskedasticity ARCH Autoregressive Conditional Heteroskedasticity ARMA Autoregressive Moving Average LPPL Log Periodic Power Law JLS Johansen - Ledoit - Sornette ERC Ethereum Requests for Comment li LIST OF TABLES Table 2.1 Comparison between NFTs and DeFi assets Table 3.1 A summary of the test’s null and alternative hypotheses 26 Table 3.2 Overview of crypto assets under examination 27 Table 3.3 Descriptive statistics of the crypto assets under examination.2 Results of PSY test 32 Table 4.3 Date-stamping bubble periods 34 Table 4.4 Bubbles statistics 38 ill LIST OF FIGURES Figure 2.1 The initial stages in constructing a hierarchical diamond lattice 17 Figure 4.1 Time Series Plot 29 Figure 4.2 Correlation matrix 31 Figure 4.3 Evolution of MANA, period from 17th September 2017 to Sth September 2023 41 Figure 4.4 Evolution of LINK, period from 24th September 2017 to 5th September 2023 41 Figure 4.5 Evolution of AVAX, period from 22nd September 2020 to 5th September 2023 41 Figure 4.6 Evolution of ZRX, period from 16th August 2017 to 5th September 2023 42 Figure 4.7 Evolution of REN, period from 21st February 2018 to 5th September 2023 42 Figure 4.8 Evolution of SNX, period from 14th March 2018 to 5th September 2023 42 Figure 4.9 Evolution of FTM, period from 30th October 2018 to 5th September 2023 42 Figure 4.10 Evolution of RSR, period from 24th May 2019 to 5th September 2023 42 Figure 4.11 Evolution of RUNE, period from 23rd July 2019 to 5th September 2023 42 Figure 4.12 Evolution of THETA, period from 17th January 2018 to 5th September 2023 42 Figure 4.13 Evolution of ENJ, period from 1st November 2017 to 5th September 2023 42 Figure 4.14 Evolution of BTC, period from 13th July 2010 to Sth September 2023 43 Figure 4.15 Evolution of ETH, period from 7th August 2015 to 5th September 2023 43 Figure 4.16 Evolution of OIL, period from Ist January 2017 to 5th September 2023 44 Figure 4.17 Evolution of GOLD, period from 1st January 2017 to 5th September 2023 44 Figure 4.18 Evolution of SPX, period from 1st January 2017 to 5th September 2023 44 Figure 4.19 Evolution of DJI, period from 1st January 2017 to 5th September 2023 44 Figure 4.20 Evolution of MSCT, period from 1st January 2017 to Sth September 2023 44 IV CHAPTER 1: INTRODUCTION 1. Research background The cryptocurrency market has become an integral part of the digital economy, enhancing innovation and bringing in promising financial potential. Various cryptocurrencies and digital assets have emerged with the prospect of becoming the future of the financial market, attracting strong interest from the financial industry and investors who are looking after promising robust growth in the future. In this context, the Non-Fungible Tokens (NFT) and Decentralized Finance (DeFi) markets have emerged as noteworthy advanced sectors.
However, both the NFT and DeFi markets carry certain risks despite their promising outlook. Looking back at the past, as of January 31st, 2022, the market capitalization of the NFT and DeFi markets was $47.08 billion, respectively, a significant increase from $340 million and $15.79 billion on January Ist, 2021 (Coinmarketcap, 2022). The rapid and substantial development of the two markets can raise suspicions regarding the purely speculative nature of these digital instruments. These factors can also create asset bubbles, where the value of some assets may be overvalued compared to their true worth.
Investors currently lack suitable tools to assess, analyze, and compare these promising but highly risky investment markets. It is commonly believed that no investor intends to hold a speculative instrument when a price spiral collapses. While rational behavior is expected to prevail in most financial markets, the history of financial markets is filled with the remnants of collapsed bubbles. Thorough research on both the NFT and DeFi markets is important to gain a better understanding of the potential and associated risks of these rapidly developing digital assets.
Thus motivated, this study will delve into and elucidate the abnormal pricing patterns of DeFi assets and NFTs by investigating the occurrence of bubbles in specific strand times of NFT and DeFi markets in comparison with other financial markets. After identifying these price bubbles in the DeFi and NFT markets, we will further analyze by linking these periods of price explosiveness to events related to DeFi and NFT assets. Furthermore, we will place our empirical results in a comparative context, demonstrating the similarities and differences in price bubbles between DeFi and NFT markets with cryptocurrency markets as well as traditional financial markets. Research objectives The primary objective of this research centers on examining bubbles in the DeFi and NFT markets, considering periods of price explosiveness connectedness to events associated with prices of DeFi and NFT assets and subsequently contrasting them with both other cryptocurrencies and conventional financial assets.
Research questions This study will seek to answer the following two research questions: First, how are the levels and magnitudes of bubbles in the NFT and DeF1 asset markets during the period under examination? Second, is there a synchronized price surge or a shared bubble period between the DeFi & NFT market bubbles and the cryptocurrency market, as well as traditional financial markets? 1. Scope of content Two DeFi assets, namely Chainlink [LINK] and Avalanche [AVAX], two NFTs: Decentraland [MANA] and Internet Computer [ICP], 11 other crypto assets including Ox [ZRX], Ren [REN], Terra [LUNA], Synthetix [SNX], Fantom [FTM], Reserve Rights [RSR], THORChain [RUNE], Theta Network [THETA], Enjin Coin [ENJ], Bitcoin [BTC] and Ethereum [ETH], and traditional financial assets such as Brent oil price [OIL], Gold price [GOLD], two indices of the US stock market (S&P 500 [SPX] and Down Jones [DJI]), and the world stock market index [MSC]]. Scope of time The initial dates in the dataset differ based on the inaugural trading day of each crypto asset. For traditional financial assets, two indices of the US Stock Market and the World Stock Market Index are from 1st January 2017.
However, the concluding date, September 5, 2023, remains uniform for all the crypto and other financial assets. Expected research contributions Firstly, this research aims to enhance readers' understanding of crypto assets in DeFi and NFT markets by providing specific information from a multitude of reliable sources. Moreover, the study provides recommendations for reliable sources of information and data about cryptocurrencies and financial assets, which can serve various purposes. Secondly, this study contributes to the existing body of literature by conducting a systematic examination of price bubbles within the unique realms of the NFT and DeFi markets.
It then arrives at a comprehensive conclusion regarding the occurrence of explosive bubble behaviors in both markets. Thirdly, this study builds upon prior research efforts that have developed and applied various time-series econometric frameworks for measuring price bubbles in financial markets (LeRoy and Porter, 1981; West, 1987; Diba and Grossman,1988b, 1988a; Johansen et al. 2000; Homm and Breitung 2012; Phillips et a/, 2015; Sharma and Escobari 2018; Corbet et al. This study stands as one of the few empirical studies, and may even be considered the first, to comprehensively identify price explosiveness in the DeFi and NFT markets, and compare it to other financial markets, using ADF, SADF, and GSADF tests.
Finally, the findings from this study hold significant value for investors, academics, market regulators, and policymakers. Detecting price bubbles can serve as an early warning signal, especially considering that, similar to cryptocurrency markets, continuous trading in NFT and DeFi markets is highly influenced by news and flash events Lucey et al. (2022) and Wang et al. Structure of the thesis The remainder of the thesis consists of four chapters.
Chapter 2 summarizes previous research on identifying price bubbles, NFTs, and DeFi markets, discusses the models employed in detecting asset bubbles, further highlights research gaps, and introduces the hypotheses developments. Chapter 3 introduces the econometric model used and provides a detailed description of the data used for conducting tests to detect price bubbles. Chapter 4 discusses the empirical analysis results and offers the primary findings of this study while Chapter 5 concludes with crucial findings and their practical and policy implications CHAPTER 2: THEORETICAL BASIS AND LITERATURE REVIEW 2. Overview of NFTs 2.
The concept of NFTs In recent times, advancements in blockchain technology have paved the way for the emergence of a novel category of digital assets known as Non-Fungible Tokens (NFTs). These tokens have attracted substantial interest and scrutiny, particularly since the start of 2021. NFT (Non-Fungible Token) is a digital asset recorded on a virtual ledger powered by blockchain technology. It represents a unique digital item, such as artwork, a video game item, or a piece of music.
Unlike traditional cryptocurrencies, NFTs are not interchangeable or divisible. They are distinct tokens, each with a unique identifier and metadata, making them irreplaceable and indivisible on the same blockchain. NFTs have become a prominent revenue generator within the cryptocurrency market, particularly in NFT marketplace development projects. In the first eight months of 2022, NFT marketplace revenue accounted for 49% of the total market revenue.
As of September 2023, the market capitalization of NFTs is approximately $674 thousand (Coinmarketcap, 2023). Additionally, India leads the world in terms of NFT holders, with 7% of the country's population involved in NFT ownership.