DP13724 Do Fundamentals Drive Cryptocurrency Prices?

Author(s): Siddharth Bhambhwani, Stefanos Delikouras, George Korniotis
Publication Date: May 2019
Date Revised: November 2019
Keyword(s): Asset Pricing Factors, Bitcoin, cointegration, Computing Power, Dash, ethereum, Hashrate, Litecoin, Monero, network
JEL(s): E4, G12, G15
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13724

We examine if two fundamental blockchain characteristics affect cryptocurrency prices. They are computing power (hashrate) and network (number of users), which are related to blockchain trustworthiness and transaction benefits. We find a significant long-run relationship between these characteristics and the prices of prominent cryptocurrencies. We also document that cryptocurrency returns are exposed to fundamental-based risk factors related to aggregate computing power and network, even after controlling for Bitcoin return 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, whose fundamentals are not included in the factors.