DP13724 Do Fundamentals Drive Cryptocurrency Prices?

Author(s): Siddharth Bhambhwani, Stefanos Delikouras, George Korniotis
Publication Date: May 2019
Date Revised: May 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. Measuring these fundamentals with computing power and adoption levels, we find a significant long-run relationship between them and the prices of five prominent cryptocurrencies. Conducting factor analysis, we find that the returns of the five cryptocurrencies are exposed to aggregate fundamental-based factors related to computing power and adoption levels, even after accounting for Bitcoin returns and cryptocurrency momentum. These factors have positive risk premia and Sharpe ratios comparable to those of the U.S. equity market. They further explain return variation in an out-of-sample set of cryptocurrencies.