Investing during a Fintech Revolution: Ambiguity and Return Risk in Cryptocurrencies

Rationally justifying Bitcoin's immense price fluctuations has remained a persistent challenge for both investors and researchers in this field. A primary reason is our potential weakness toward robustly quantifying unquantifiable risks or ambiguity in Bitcoin returns. This paper introduces a behavioral channel to argue that the degree of ambiguity aversion is a prominent source of abnormal returns from investment in Bitcoin markets. Using data over a ten-year period, we show that Bitcoin investors exhibit, on average, an increasing aversion to ambiguity. Furthermore, investors are found to earn abnormal returns only when ambiguity is low. Robustness exercises reassure the validity of our results.

Keywords: Bitcoin; Ambiguity; Abnormal returns

JEL Classification: C0; G1

Suggested Citation: Suggested Citation

Luo, Di and Mishra, Tapas and Yarovaya, Larisa and Zhang, Zhuang, Investing during a Fintech Revolution: Ambiguity and Return Risk in Cryptocurrencies (May 17, 2021). Journal of International Financial Markets, Institutions and Money, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3851629