DP16908 Was the ICO Boom just a Sideshow of the Bitcoin and Ether Momentum?

Author(s): Franklin Allen, Antonio Fatás, Beatrice Weder di Mauro
Publication Date: January 2022
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Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16908

We investigate whether the market for ICOs in 2017-2018 showed signs of contagion from prices of the largest cryptocurrencies (Bitcoin and Ether). We find evidence that during phases of optimism, ICO daily returns display low correlations with those of Bitcoin or Ether. But when the bubble bursts, correlations jump to very high levels, signaling that the ICO market becomes a sideshow of the cryptocurrency dynamics. We show that the same dynamics were present in 2021 when Bitcoin and Ether went through a similar episode. We demonstrate that this high correlation was not present during the Nasdaq bubble in the 1990s, signaling that the price dynamics of digital tokens seems to be driven by a common factor, much more than in previous bubbles.