MACRO FACTORS IN THE RETURNS ON CRYPTOCURRENCIES

Abstract

This study investigates the relationship between expected returns on cryptocurrencies and macroeconomic fundamentals. Investors employ a lot of macroeconomic indicators for their investment decision, and hence adopting a few macroeconomic indicators is not sufficient in capturing a change in economic states. Moreover, due to aggregation, macroeconomic indicators are not measured precisely. To overcome these problems, we employ a dynamic factor model and extract common factors from a large number of macroeconomic indicators. We find that the common factors are strongly linked to the cryptocurrency expected returns at a quarterly frequency, while we do not observe this relationship using macroeconomic indicators such as inflation and money supply. This suggests that macroeconomic information matters in a longer term, which contrasts with the previous literature that explores a short-term relationship. The cryptocurrency prices are not determined by macroeconomic fundamentals in a short-term period since speculators impact the prices. However, in a long-term period, the prices are more linked to macroeconomic fundamentals.