The Cross-Section of Cryptocurrency Returns
52 Pages Posted: 7 Oct 2018
Date Written: September 14, 2018
This paper studies cryptocurrency investment strategies from the perspective of U.S. investors. We take Bitcoin as a representative cryptocurrency and consider exchanges around the globe where investors can trade different fiat and cryptocurrency pairs (i.e., U.S. dollar for Bitcoin). We treat each currency pair as a different asset. We start off large, persistent, and mean-reverting deviations in bitcoin prices, converted in U.S. dollars, and uncover two investment strategies based on information on past price deviations that generate large cross-sections of excess returns. A principal component analysis shows that most of the variation in the cross-sections of returns is explained by two common components. We find that these components are correlated with crypto factors but poorly correlated with a large set of standard non-crypto factors.
Keywords: bitcoin; cryptocurrencies; market anomalies; excess returns; kimchi premium
JEL Classification: G12; G14; G15; F31
Suggested Citation: Suggested Citation