"Risks and returns of cryptocurrency" Liu, Yukun and Aleh Tsyvinski

Question 1

How is crypto different from the equity market?

Answer 1

Paper shows that the momentum result and the investor attention result, which are useful predictors of crypto, are separate phenomena and that there is only limited interaction between them.

In the equity market they are not separate, are highly correlated.

Question 2

How is crypto correlated with traditional asset classes?

Answer 2

Cryptocurrency returns have low exposures to traditional asset classes such as currencies, commodities, and stocks, and to macroeconomic factors.

Question 3

How is crypto performance different from traditional assets?

Answer 3

Compared to traditional assets, cryptos shows:
*Higher mean and standard deviation
*Positive skewness
*Higher probability of disasters and miracles

Question 4

Are the returns from the cryptocurrency market compensated by risk factors from the stock market?

Answer 4

Determinants of crypto market returns:
○ CAPM betas are mostly not significant
○ Alphas are large and statistically significant for all models
○ Cryptos had negative and significant exposure to HML – crypto currencies comove with growth
rather than value stocks
○ Authors look at 155 other factors, not significant

Question 5

Does crypto have exposure to major currencies (EUR, GBP, AUD, CAD)?

Answer 5

No evidence of crypto exposure to major currencies.

This was a testing of a popular view that cryptocurrency may serve as another medium of exchange.

Question 6

What does Ethereum have significant exposures to?

Answer 6

ETH is positively and significantly exposed to Gold.

ETH has negative and significant loading on durable consumption growth factor.

Question 7

Which return determining factors are specific to crypto?

Answer 7

● Momentum (weekly returns statistically significantly predict next 1–4 weeks returns)
● Positive investor attention predicts high returns (and negative predicts negative)
● Weak significance for cost of mining

Question 7

What are the implications of crypto?

Answer 7

● Risk-return tradeoff of cryptos differs from the risk-return tradeoff of stocks, currencies and precious metals
● Markets don’t consider cryptocurrencies to be a medium of exchange equivalent to currencies or a store of value equivalent to precious metals
● Popular explanations that mining costs, price-to-dividend ratio, realized volatility could predict crypto returns have no support in data