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Blockchain Characteristics and the Cross-Section of Cryptocurrency Returns

Last Updated on 10 February, 2024 by Rejaul Karim

The study “Blockchain Characteristics and the Cross-Section of Cryptocurrency Returns” by Siddharth Bhambhwani, George M. Korniotis, and Stefanos Delikouras embarks on an exploration of the impact of blockchain attributes, including network size and computing power, on cryptocurrency prices and returns.

The findings weave a compelling narrative, demonstrating the cointegration of cryptocurrency prices with these fundamental blockchain characteristics, aligning with theoretical models.

Notably, the study introduces a stochastic discount factor integrating aggregate network and computing power, shedding light on its efficacy in explicating the cross-sectional variation in expected cryptocurrency returns, rivaling traditional models reliant on cryptocurrency return-based factors.

The study illuminates the pivotal role of theoretically motivated factors as substantial sources of risk for cryptocurrency prices and the concomitant anticipated returns, underscoring the indispensability of blockchain dynamics in shaping the cryptocurrency landscape.

Abstract Of Paper

We examine whether blockchain characteristics such as network size and computing power affect cryptocurrency prices and returns. Consistent with theoretical models, cryptocurrency prices are cointegrated with these two blockchain characteristics. Further, a stochastic discount factor with aggregate network and computing power explains the cross-sectional variation in expected cryptocurrency returns at least as well as models with cryptocurrency return-based factors (market, size, momentum). Overall, our results show that theoretically motivated factors are important sources of risk for cryptocurrency prices and expected returns.

Original paper – Download PDF

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Author

Siddharth Bhambhwani
Arkansas Tech University

George M. Korniotis
University of Miami – Department of Finance

Stefanos Delikouras
University of Miami – Department of Finance

Conclusion

In essence, “Blockchain Characteristics and the Cross-Section of Cryptocurrency Returns” culminates in a compelling revelation of the pivotal role played by blockchain attributes in shaping cryptocurrency prices and returns.

Through a meticulous exploration of network size and computing power, the study underscores the poignant cointegration of cryptocurrency prices with these foundational blockchain characteristics, in alignment with theoretical models.

Notably, the introduction of a stochastic discount factor interwoven with aggregate network and computing power illuminates its efficacy in elucidating the cross-sectional variability in anticipated cryptocurrency returns, rivaling models anchored solely in cryptocurrency return-based factors such as market and size momentum.

The study paints a vivid picture of the profound significance of theoretically motivated factors as prominent determinants of risk for cryptocurrency prices, underpinning the landscape of anticipated returns and the pervasive impact of blockchain dynamics in shaping the cryptocurrency domain.

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FAQ

Q1: What is the main focus of the research paper “Blockchain Characteristics and the Cross-Section of Cryptocurrency Returns”?

A1: The main focus of the research paper is to examine the impact of blockchain characteristics, specifically network size and computing power, on cryptocurrency prices and returns. The study explores the cointegration of cryptocurrency prices with these fundamental blockchain attributes and evaluates their role in explaining the cross-sectional variation in expected cryptocurrency returns.

Q2: What does the study find regarding the relationship between cryptocurrency prices and blockchain characteristics?

A2: The study finds that cryptocurrency prices are cointegrated with blockchain characteristics, specifically network size and computing power. This implies a significant relationship between these fundamental blockchain attributes and the valuation of cryptocurrencies, aligning with theoretical models.

Q3: What is the stochastic discount factor introduced in the study, and how does it contribute to understanding cryptocurrency returns?

A3: The study introduces a stochastic discount factor that incorporates aggregate network and computing power. This factor is designed to explain the cross-sectional variation in expected cryptocurrency returns. The research demonstrates that this factor is effective in elucidating the variability in anticipated cryptocurrency returns, comparable to models that rely solely on cryptocurrency return-based factors like market and size momentum.

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