Network Hype and Asset Pricing of Cryptocurrencies: Evidence Based on a Google-Attention Approach

Abstract

The rapid development of cryptocurrencies motivates us to examine the factors that drive cryptocurrency prices. Using Google attention innovation ($GAI$) to measure network hype or investor speculation, this paper investigates the effect of network hype in the cryptocurrency market and proposes a three-factor asset pricing model composed of the market, size, and network hype($GAI$) factors. This paper is the first empirical study on asset pricing in cryptocurrency markets and is a unique attempt to value the cryptocurrencies prices using a factor model. The empirical results show: (1) There is a positive and significant effect of network hype in the cryptocurrency market, and network hype plays a significant role in increasing cryptocurrency prices. (2) Average excess returns of cryptocurrencies are negatively correlated with their size and have a significant positive correlation with Google attention innovation. (3) Our three-factor model has strong explanatory power for excess cryptocurrency returns and can explain the momentum, reversal, and liquidity factors in the cryptocurrency market.

Keywords: cryptocurrency, asset pricing, network hype, three-factor model, google attention

JEL Classification: G11, G12, G32