Yield and Fluctuation of Cryptocurrency under the Covid-19 Pandemic: Empirical Research based on Ethereum

Abstract

The Covid-19 pandemic has caused one of the most severe systematic shocks to global financial markets as investors discovered the sudden slumps in major global stocks indexes in March 2020. However, at the same time, the pandemic also accelerated the rise of decentralized finance and cryptocurrencies as the public began to shift their investments from traditional stock markets to the newly emerged fintech markets as the decentralized financial market’s risks hedging ability are believed to be better during global emergencies. Although it’s tempting to attribute these observed phenomena solely to the Covid-19 pandemic, other political shocks such as the US 2020 election and China’s crypto crackdown in 2021 also exacerbated the uncertainties and thus should be considered as potential reasons for the observations. Through theoretical analysis on financial and political economics as well as empirical modeling utilizing Stata17, this report has constructed a time series ARMA-GARCH model quantifying the relationship between Ethereum’s investment return and potential factors including the daily new confirmed cases of Covid-19 and other policy changes, and discovered for the first time that the rise of Ethereum’s investment return is majorly caused by the two aforementioned policy changes, and the rapid infection of Covid-19 only caused a short-term rise in Ethereum’s investment return whereas the daily new infection numbers of the later stage only caused fluctuations to the Ethereum trading market. Based on the findings, the article made recommendations for both policy makers and investors on crypto investments during the fintech era.