Are DeFi Tokens a Separate Asset Class from Conventional Cryptocurrencies?

34 Pages Posted: 20 Apr 2021

See all articles by Shaen Corbet

Shaen Corbet

Dublin City University ; University of Waikato - Management School

John W. Goodell

University of Akron - Department of Finance, College of Business Administration

Samet Gunay

American University of the Middle East (AUM)

Kerem Kaskaloglu

American University of the Middle East (AUM)

Date Written: March 23, 2021

Abstract

We test for the existence of bubbles in DeFi-focused cryptocurrencies, seeking to identify key driving forces that distinguish DeFi tokens from conventional cryptocurrencies. Conducting Supremum Augmented Dickey-Fuller, and Hacker-Hatemi-J modified Wald tests, as well as Diebold-Yilmaz return and volatility spillover analysis, results evidence the presence of bubbles in key DeFi assets during the third quarter of 2020. Additional causality analysis suggests that, while Bitcoin has a causal nexus with most conventional tokens, amongst DeFi it only causes Link and Mkr. According to Diebold-Yilmaz test results, while spillovers of returns and volatilities between the conventional and DeFi markets are predominantly between Bitcoin and Mkr, contra general views about Bitcoin’s dominance, Ethereum is found to be the leading cryptocurrency influencer of conventional tokens. However, we do not observe Ethereum or Bitcoin causing bubbles in the DeFi market. Rather we find Link and Mkr are primary contributors, in terms of returns and volatilities, to DeFi bubbles. Results of our analysis suggest that the DeFi market should be viewed as a separate asset class from conventional cryptocurrencies. However, this view is slightly nuanced, with strong correlations between certain DeFi tokens and Bitcoin. DeFi tokens that are particularly prominent (Mkr and Link) are closest to acting like conventional tokens. Our findings suggest that groupings of cryptocurrencies manifest as separate asset classes; therefore the operational process of portfolio construction needs to consider inclusion of DeFi cryptocurrencies in order to optimize diversification.

Keywords: Cryptocurrency; Decentralized Finance Tokens; Bubbles; Volatility Spillovers

Suggested Citation

Corbet, Shaen and Goodell, John W. and Gunay, Samet and Kaskaloglu, Kerem, Are DeFi Tokens a Separate Asset Class from Conventional Cryptocurrencies? (March 23, 2021). Available at SSRN: https://ssrn.com/abstract=3810599 or http://dx.doi.org/10.2139/ssrn.3810599

Shaen Corbet (Contact Author)

Dublin City University ( email )

Dublin 9
Ireland

University of Waikato - Management School ( email )

Hamilton
New Zealand

John W. Goodell

University of Akron - Department of Finance, College of Business Administration ( email )

259 S. Broadway
Akron, OH 44325
United States

Samet Gunay

American University of the Middle East (AUM) ( email )

250 St.
Block 3, Building 1
Egaila
Kuwait

Kerem Kaskaloglu

American University of the Middle East (AUM) ( email )

250 St.
Block 3, Building 1
Egaila
Kuwait

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