Recently a working paper has been released by a US think tank National Bureau of Economic Research that has a rather unique take on cryptocurrencies. As it claims that the returns and price movements in cryptocurrency are a direct factor of the type of attention they attract which is completely in contrast to the traditional financial markets.
Drafted by two Yale University economists Aleh Tsyvinski and Yukun Liu, the paper raises an argument claiming that since cryptocurrencies have no exposure to most macroeconomic factors and stock markets and nor do they have any kind of exposure to returns of either currencies or commodities, rather their price movements are affected by a completely different set of factors and returns too.
Significantly, the paper highlights some specific parameters that can be utilized for predicting the returns on several coins like XRP, Ethereum (ETC) and, Bitcoin (BTC).
The paper further raises an argument stating “high investor attention predicts high returns in the future over a one week period for Ripple(XRP), 1-2 week horizon for Bitcoin, and 1-6 week horizon for Ethereum.”
Based entirely on a financial model known as capital asset pricing model or CAPM, the study states that a “one-standard-deviation” increase in the Google search for Bitcoin produces a 2.3 percent increase in the upcoming two weeks. The greater the deviation, more spread out the data points ( for bitcoin it is seen in its price). Standard deviation is basically a statistical measure of the spread of data points.
And in accordance to that, a one-standard-deviation increase for a post on for bitcoin brings a 2.5 percent increase in the upcoming one week.
In the paper, it also shows that return on Ethereum is exposed to a specific degree to the stock returns of Advanced Micro Devices (AMD), that is one of the major manufacturers of specialized mining hardware.
Liu and Tsyvinski further went on to state, “We reach a conclusion that cryptocurrency does indeed represent an asset class that can be assessed by the use of simple finance tools. However, despite that, cryptocurrencies also represents an asset class that is radically different in comparison to traditional asset classes.”