Blockchain Characteristics and the Cross-Section of Cryptocurrency Returns

Abstract

We examine whether blockchain characteristics such as network size and computing power affect cryptocurrency prices and returns. Consistent with theoretical models, cryptocurrency prices are cointegrated with these two blockchain characteristics. Further, a stochastic discount factor with aggregate network and computing power explains the cross-sectional variation in expected cryptocurrency returns at least as well as models with cryptocurrency return-based factors (market, size, momentum). Overall, our results show that theoretically motivated factors are important sources of risk for cryptocurrency prices and expected returns.

Keywords: Hashrate, Network, Factor Analysis, GMM, Rolling Estimation

JEL Classification: E4, G12, G15