DP13724 Do Fundamentals Drive Cryptocurrency Prices?

Author(s): Siddharth Bhambhwani, Stefanos Delikouras, George Korniotis
Publication Date: May 2019
Date Revised: June 2019
Keyword(s): Asset Pricing Factors, Bitcoin, cointegration, Computing Power, Dash, ethereum, Hashrate, Litecoin, Monero, network
JEL(s): E4, G12, G14
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13724

We test the theoretical prediction that blockchain trustworthiness and transaction benefits determine cryptocurrency prices. We measure these two fundamentals with blockchain computing power (i.e., hashrate) and network size, respectively, and find a significant long-run relationship between these blockchain characteristics and the prices of five prominent cryptocurrencies. We also document that the returns of the five cryptocurrencies are exposed to fundamental-based risk factors related to computing power and network size, even after controlling for Bitcoin returns and cryptocurrency momentum. In out-of-sample tests, the computing power and network factors can explain the return variation of a broad set of cryptocurrencies.