Are Cryptocurrencies Priced in the Cross-section? A Portfolio Approach
32 Pages Posted: 5 May 2020 Last revised: 8 Jun 2022
Date Written: April 9, 2020
Most papers, that study determinants of cryptocurrency prices, find no significant relation with existing market factors. In this paper, we use cross-sectional techniques to examine their price dynamics. Since Bitcoin, there has been a remarkable increase in the number of cryptocurrencies. Hence, investors have more choices when they decide to enter into this market and, so, have an incentive to understand its interaction with their current investments, particularly in the cross-section. Using 110 cryptocurrencies based on their market capitalization, from September 2014 to June 2021, we study eighteen (18) factors that belong to three asset classes, i.e., equity, currency, and commodity. We find cryptocurrencies have a strong negative correlation with equity market returns (confirmed by a strong positive correlation with the VIX) and precious metals, in our cross-sectional regressions and portfolio sorting analysis. Our results highlight the influence of equity and precious metals on the cryptomarket. These novel findings show that cryptocurrencies have both investment and commodity functions. The currency function can also be detected from our results.
Keywords: Empirical asset pricing, cross-sectional analysis, cryptocurrency
JEL Classification: C8, G10, G12
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