Value Premium, Network Adoption, and Factor Pricing of Crypto Assets

Abstract

We document characteristics-based return anomalies in a large cross-section (>4,000) of crypto assets. Cryptocurrency returns exhibit momentum in the largest-cap group, reversals in other size groups, and strong crypto value and network adoption premia, from which we derive two novel factors to add to the cryptocurrency versions of market, size, and momentum factors. The resulting C-5 model outperforms extant models in pricing the cross-section of crypto assets and test portfolios in-sample and out-of-sample. We also provide the first comprehensive classification of all major cryptocurrencies based on their economic functionality. We then adopt methodologies from international finance to demonstrate significant market segmentation across token categories, underscoring the importance for considering token categories in investment and regulatory policymaking.

Keywords: Blockchain, Cryptocurrency, DeFi, Factor Models, Network Effect, Market Segmentation

JEL Classification: F30, G10, G11, G15