Working Paper: NBER ID: w24877
Authors: Yukun Liu; Aleh Tsyvinski
Abstract: We establish that the risk-return tradeoff of cryptocurrencies (Bitcoin, Ripple, and Ethereum) is distinct from those of stocks, currencies, and precious metals. Cryptocurrencies have no exposure to most common stock market and macroeconomic factors. They also have no exposure to the returns of currencies and commodities. In contrast, we show that the cryptocurrency returns can be predicted by factors which are specific to cryptocurrency markets. Specifically, we determine that there is a strong time-series momentum effect and that proxies for investor attention strongly forecast cryptocurrency returns. Finally, we create an index of exposures to cryptocurrencies of 354 industries in the US and 137 industries in China.
Keywords: Cryptocurrency; Risk-return tradeoff; Investor attention; Momentum
JEL Codes: G12; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Strong time-series momentum effect (C22) | Bitcoin's next day's return (G13) |
| Proxies for investor attention (G34) | Future cryptocurrency returns (G13) |
| Rise in negative searches (K42) | Bitcoin returns the following week (E42) |
| Cryptocurrency returns (G13) | Traditional asset classes (G19) |
| Cryptocurrencies (E42) | Common stock market and macroeconomic factors (E44) |