Are Cryptocurrencies Priced in the Cross-section? A Portfolio Approach

Abstract

Most papers, that study determinants of cryptocurrency prices, find no significant relation with existing market factors. We examine a portfolio approach to explore cross-sectional pricing within the cryptomarket. At its inception, Bitcoin meant to be an alternative to fiat currencies. Yet high returns in this market may have also attracted usual investors as well, because of these new investment opportunities and diversification venues. Since Bitcoin, the number of cryptocurrencies has reached more than 6,000 at the beginning of 2020, according to coingecko.com. Hence, investors have more choices when they decide to enter into the cryptomarket. So, they have an incentive to understand the cryptomarket interaction with their current investments. We examine ten factors from equity, currency, and commodity markets and find out that size and commodity index have a negative and highly significant correlation in the cross-section. These results support the market participants’ view that cryptocurrencies are still too volatile to serve as a store of value. In the sense that, cryptocurrencies with a negative sensitivity to physical commodities are appreciated by investors.

Keywords: Empirical asset pricing, cross-sectional tests, cryptocurrency

JEL Classification: C8, G10, G12