Common Risk Factors in the Returns on Cryptocurrencies

Abstract

This paper identifies three common risk factors in the returns on cryptocurrencies, which are related to cryptocurrency market return, market cap (size) and momentum of cryptocurrencies. Using the empirical data of cryptocurrencies, we find strong evidence that there are anomalous returns that decrease with size and increase with return momentum, and the momentum effect is more significant for small cryptocurrencies. Moreover, Fama-Macbeth regressions show the size and momentum combine to capture the cross-sectional variation in average cryptocurrency returns. In the tests of the three-factor model, we find most cryptocurrencies and portfolios have significant exposure to the proposed three factors with insignificant intercepts, demonstrating that the three factors explain average returns well on cryptocurrencies.

Keywords: Cryptocurrency; Market return; Size; Momentum; Factor model

JEL Classification: G12