DP13724 Blockchain Characteristics and the Cross-Section of Cryptocurrency Returns

Author(s):	Siddharth Bhambhwani, Stefanos Delikouras, George Korniotis
Publication Date:	May 2019
Date Revised:	October 2020
Keyword(s):	Bitcoin, cointegration, Dash, ethereum, GMM estimation, Hashrate, Investor Sentiment, Litecoin, 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 the relation between cryptocurrency returns and two blockchain characteristics, computing power and network size. We show that cryptocurrency prices are cointegrated with computing power and network. Further, cryptocurrency returns have positive and significant risk exposures to factors based on aggregate computing power and network size even after controlling for Bitcoin's return and sentiment-related factors. The two aggregate blockchain characteristics are procyclical asset pricing factors with positive risk premia and explain a significant portion of the cross-sectional variation in expected cryptocurrency returns. In out-of-sample tests, the blockchain factors can explain the return variation of a broad set of cryptocurrencies.