Cryptocurrencies As an Asset Class? An Empirical Assessment

Abstract

This article empirically investigates some of the key features of cryptocurrency returns and volatilities, such as their relationship with traditional asset classes, as well as the main driving factors behind market activity. The main empirical results suggest that while there is a mild relationship between returns on cryptocurrencies and commodities, and precious metals in particular, the relationship does not translate into volatility spillover effects. Consistent with existing theoretical models in which trading activity is primarily driven by investor sentiment, we show that trading volume is driven by past returns. On the other hand, macroeconomic factors do not seem to affect market activity in either the short term or the long term. <b>TOPICS:</b>Currency, exchanges/markets/clearinghouses <b>Key Findings</b> • There is only a mild, and not significant, correlation between returns on cryptocurrencies and returns on traditional asset classes on a daily basis. • Past returns significantly drive trading volume, consistent with the idea that short-term market activity is primarily driven by sentiment. • Macroeconomic factors such as the term structure of interest rates and inflation expectations do not seem to affect market activity in either the short or the long term.