Cryptocurrency Exchanges and Comovements of Cryptocurrency Returns

Abstract

This paper documents that similarity in cryptocurrencies' investor bases proxied by their trading exchange is the main driver of cryptocurrencies' comovement structure. This comovement structure is far stronger than can be explained by similarities in cryptocurrency characteristics such as size, volume, age, consensus mechanism, and industries. I examine three potential channels for these results. First, evidence from new exchange listings and a quasi-natural experiment shows that unobservable characteristics cannot explain these results. Second, the results are driven by exchange-specific commonalities in demand that lead to global price movements across exchanges. Third, analysis of social media data shows that the demand-driven comovement is significantly larger for cryptocurrencies that rely heavily on organic adoption. Overall, these findings suggest that unique features of cryptocurrencies make demand pressures a first-order driver of cryptocurrency returns.

Keywords: Cryptocurrency, Return Structure, Comovement, Crypto-Exchanges, Network Effect

JEL Classification: G10, G11, G12