Risks and Returns of Cryptocurrency
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.
We thank Andrew Atkeson, Nicola Borri, Eduardo Davila, Stefano Giglio, William Goetzmann, Stephen Roach, and Robert Shiller for their comments. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Yukun Liu & Aleh Tsyvinski & Itay Goldstein, 2021. "Risks and Returns of Cryptocurrency," The Review of Financial Studies, vol 34(6), pages 2689-2727.