Are Cryptocurrencies Exposed to Factor Risk?

Abstract

We show that cryptocurrency prices fluctuate with asset pricing factors. Using data on the 110 largest cryptocurrencies by market capitalization, we test the pricing ability of 20 factors belonging to three asset classes, i.e., stocks, currencies, and commodities. We base our tests on the grouping strategies proposed by Black, Jensen, and Scholes (1972), which have been shown to significantly reduce the bias in factor loading estimates. We find that cryptocurrency returns are positively correlated with equity and commodity markets and negatively correlated with currency factors, suggesting that these factors can be used to price cryptocurrencies in the cross-section.

Keywords: Asset pricing, factor risk, cryptocurrency, time-series tests, cross-sectional analysis

JEL Classification: C8, G10, G12