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New research highlights two factors that can predict cryptocurrency returns

Thu, 09 Aug 2018, 09:40 am UTC

A new study, published by the National Bureau of Economic Research, has stated that the cryptocurrency returns can be predicted by factors which are specific to crypto markets.

The study, authored by Yale economist Aleh Tsyvinski and Yukun Liu, a Ph.D. candidate in the Department of Economics, explores whether cryptocurrency returns behave similarly to other asset classes such as stocks, currencies, and precious metals. It particularly focuses on three major cryptocurrencies – Bitcoin, Ripple, and Ethereum.

“[W]e established that the risk-return tradeoff of cryptocurrencies is distinct from those of stocks, currencies and precious metals. Hence, there is little evidence, in the view of the markets, behind the popular narratives that there are similarities between cryptocurrencies and these traditional assets,” the authors said.

Furthermore, the research found that cryptocurrency returns can be predicted by two factors specific to its markets – momentum and investors attention.

The researchers show that there is significant “time-series cryptocurrency momentum” at the daily and weekly frequencies for all three cryptocurrencies. Taking the case for Bitcoin, they show that the current return positively and statistically significantly predicts the return for the following week.

The report also shows that high investor attention predicts high future returns over 1-2 week horizons for Bitcoin, a 1-week horizon for Ripple, and 1-, 3-, and 6-week horizons for Ethereum.

“Our findings call into question popular explanations that supply factors such as mining costs, price-to-”dividend” ratio, or realized volatitility are useful for predicting the behavior of cryptocurrency returns,” it said.

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