Do Fundamentals Drive Cryptocurrency Prices?
66 Pages Posted: 6 Mar 2019 Last revised: 11 May 2019
Date Written: May 9, 2019
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.
Keywords: Bitcoin, Ethereum, Litecoin, Monero, Dash, Hashrate, Computing Power, Network, Cointegration, Asset Pricing Factors
JEL Classification: E4, G12, G14
Suggested Citation: Suggested Citation