What Do Investors Care About in Cryptocurrency Markets? Evidence from ESG Ratings and NFTs

Abstract

While cryptocurrencies have seen limited adoption as a medium of exchange, they have been recognised as a new class of investment assets. A broader range of investors, including institutional investors, has shown growing interest in cryptocurrency and digital assets. Therefore, this thesis contributes to the literature by thoroughly examining digital technologies as investment assets through three empirical studies. The first study explores whether investors prefer blockchains with strong Environmental, Social, and Governance (ESG), using a novel dataset of blockchain ESG scores. The findings reveal a time-varying preference for high-ESG blockchains. The top-rated blockchains outperform lower-rated ones during favourable market conditions and optimistic market sentiment but underperform during times of negative sentiment. Our findings also indicate that high-ESG blockchains exhibit higher market volatility. Furthermore, governance and environmental factors have the strongest influence on investor preferences among the three ESG dimensions. The second study examines NFTs as a relatively new asset class that is not yet fully understood, particularly in terms of risk modelling. It evaluates and compares the forecasting performance of various GARCH models in estimating NFT market volatility across different time horizons. The selected models include GARCH(1,1), IGARCH(1,1), EGARCH(1,1), GJR- GARCH(1,1), and TGARCH(1,1). The dataset comprises three major NFT categories, six NFT token platforms, and major cryptocurrencies, including Bitcoin and Ethereum. Empirical evidence shows that different models perform better depending on the asset type and forecast horizon. The findings highlight the highly volatile nature of NFT markets. The third study assesses the impact of visual attractiveness on NFT market prices. Prior art literature has demonstrated the role of aesthetics in influencing art prices. Given the similarities between NFTs and traditional art, this study investigates whether aesthetics similarly impact NFT prices. The empirical analysis focuses on one of the largest NFT collections, CryptoPunks, by applying a hedonic pricing model. We employ quantitative aesthetic measures to capture aspects of NFT art, including colourfulness, brightness, colour intensity, and texture. Our results reveal a significant impact of visual aesthetics on determining NFT prices. The results indicate that more colourful and visually complex NFTs are associated with higher prices, while brighter and more saturated NFTs are associated with lower prices.