Working Paper: CEPR ID: DP16908
Authors: Franklin Allen; Antonio Fatas; Beatrice Weder di Mauro
Abstract: We investigate whether the market for ICOs in 2017-2018 showed signs of contagion from prices of the largest cryptocurrencies (Bitcoin and Ether). We find evidence that during phases of optimism, ICO daily returns display low correlations with those of Bitcoin or Ether. But when the bubble bursts, correlations jump to very high levels, signaling that the ICO market becomes a sideshow of the cryptocurrency dynamics. We show that the same dynamics were present in 2021 when Bitcoin and Ether went through a similar episode. We demonstrate that this high correlation was not present during the Nasdaq bubble in the 1990s, signaling that the price dynamics of digital tokens seems to be driven by a common factor, much more than in previous bubbles.
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Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| ICO returns during downturns (E32) | Correlation with Bitcoin and Ether prices increases (E39) |
| Investor sentiment (G41) | ICO pricing (L50) |
| Market distress (G19) | High correlation between ICO returns and Bitcoin and Ether returns (G19) |
| Market conditions (optimistic vs downturn) (E32) | Correlation dynamics of ICOs with Bitcoin and Ether (C69) |
| ICO market behavior during downturns (E32) | Distinct relationship compared to NASDAQ bubble (E32) |