Drivers of Cryptocurrency Returns—An Analysis through the Lens of Sustainability

Abstract

As sustainability plays an increasingly important role in finance, understanding its influence on emerging assets such as cryptocurrencies is essential for portfolio management. This article analyzes the relation between sustainability and cryptocurrency returns. To address and reveal complexity in relationships, we use non-linear machine learning methods. We find that sustainability variables, like energy consumption and environmental attention, are important return determinants. The greenness of a cryptocurrency measured by the consensus mechanism is a group-specific differentiation variable for the most sustainable cryptocurrencies with a positive impact on their returns. The economic relevance of their green consensus mechanism materializes primarily in the lower tail of the return distribution by providing downside protection. We detect a clear upward trend in complexity, with maxima during COVID-19 and the change of Ethereum’s consensus mechanism from Proof of Work to the more environmentally friendly alternative Proof of Stake. These findings underline the importance of considering sustainability factors in cryptocurrency investment decisions, offering new insights for investors as well as policymakers.