Investors’ Beliefs and Asset Prices: A Structural Model of Cryptocurrency Demand

69 Pages Posted: 11 Aug 2020

See all articles by Matteo Benetton

Matteo Benetton

University of California, Berkeley - Haas School of Business

Giovanni Compiani

University of Chicago Booth School of Business

Date Written: August 6, 2020

Abstract

We explore the impact of investors’ beliefs on cryptocurrency demand and prices using three new individual-level surveys. We find that younger individuals with lower income and education are more optimistic about the future value of cryptocurrencies, as are late investors. We then estimate the cryptocurrency demand functions using a structural model with rich heterogeneity in investors’ beliefs and preferences. To identify the model, we combine observable beliefs with an instrumental variable strategy that exploits variation in the amount of energy required for the production of the different cryptocurrencies. We find that beliefs explain a large fraction of the cross-sectional variance of returns. A counterfactual exercise shows that banning entry of late investors leads to a decrease in the price of Bitcoin by about $3,500, or approximately 30% of the price during the boom in January 2018. Late investors’ optimism alone can explain about a third of the decline.

Keywords: Beliefs, Demand system, Cryptocurrencies, Surveys, Sentiment, Retail investors

JEL Classification: D84, G11, G41

Suggested Citation

Benetton, Matteo and Compiani, Giovanni, Investors’ Beliefs and Asset Prices: A Structural Model of Cryptocurrency Demand (August 6, 2020). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2020-107, Available at SSRN: https://ssrn.com/abstract=3668582 or http://dx.doi.org/10.2139/ssrn.3668582

Matteo Benetton

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

Giovanni Compiani (Contact Author)

University of Chicago Booth School of Business ( email )

Chicago, IL
United States

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