Factor Structure in Cryptocurrency Returns and Volatility

Abstract

We use high-frequency tick data to study stylized facts of the return and volatility dynamics of the nine most liquid cryptocurrencies. Factor structures exist in both returns and volatility, but the explanatory power from the common factor is much stronger for volatility. The factor structures do not relate strongly to fundamental economic factors, and Bitcoin – which we propose is a “crypto market factor” – also has only weak explanatory power. We date the bubble in Bitcoin allowing us to split the sample into pre-, bubble and post-bubble regimes. The importance of these different regimes is clear, revealing shifting relationships between the nine cryptocurrencies and Bitcoin. Model-free realized cryptocurrency betas with Bitcoin increase during the bubble and the explained fraction of cryptocurrency variance remains at an elevated level after the bubble collapsed.

Keywords: Cryptocurrency, Factor Structure, Bitcoin Bubble, Realised Volatility

JEL Classification: C38, G12, G13