The Financialization of Cryptocurrencies

68 Pages Posted: 25 Oct 2021 Last revised: 13 Mar 2024

See all articles by Lei Huang

Lei Huang

The University of Hong Kong - Faculty of Business and Economics

Tse-Chun Lin

The University of Hong Kong - Faculty of Business and Economics

Fangzhou Lu

The University of Hong Kong - Department of Finance; Massachusetts Institute of Technology (MIT) - Sloan School of Management

Jian Sun

Lee Kong Chian School of Business, Singapore Management University

Date Written: October 23, 2021

Abstract

We show that change in Grayscale Bitcoin Trust premium is the single most significant predictor of Bitcoin daily return. This sentiment measure is similar to the closed-end fund discount measure as in Baker and Wurgler (2006), but more likely to reflect the excess demand from traditional investors than from blockchain specialists. Although there is a substantial variation in Bitcoin price quotes worldwide, this Grayscale premium and discount predict Bitcoin daily return for the most liquid Bitcoin exchanges. Using K-means clustering and LDA analysis, we find that this predictability is especially significant when there is a large variation in bullish and bearish market sentiment, innovation regarding CBDC, regulations on crypto exchanges, but not when there is innovation regarding blockchain technology or bitcoin mining. A simple long and short strategy based on this signal generates a daily alpha of 40 bps. These findings suggest that Bitcoin prices react with a delay to the information contained in the sentiment of traditional investors and investors who are constrained from directly holding Bitcoin.

Keywords: Cryptocurrency, Bitcoin ETFs, Coinbase, GBTC, Sentiment

JEL Classification: E42, G12, G30, G41

Suggested Citation

Huang, Lei and Lin, Tse-Chun and Lu, Fangzhou and Sun, Jian, The Financialization of Cryptocurrencies (October 23, 2021). Available at SSRN: https://ssrn.com/abstract=3948407 or http://dx.doi.org/10.2139/ssrn.3948407

Lei Huang

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Tse-Chun Lin

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Fangzhou Lu (Contact Author)

The University of Hong Kong - Department of Finance ( email )

Pokfulam
Hong Kong

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

Jian Sun

Lee Kong Chian School of Business, Singapore Management University ( email )

Li Ka Shing Library
70 Stamford Road
Singapore 178901, 178899
Singapore

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