The appealing features of cryptocurrency in the digital money sector have put them into the category of investable assets. Investment professionals have begun to consider their investability and diversification benefits. It is vital for investors to understand the return-risk behaviour among investable assets to reap the benefits of diversification. This paper considers a proxy of cryptos, specifically Bitcoin, Litecoin, Ethereum, Ripple & Neo, and the Middle East stock market indices, to examine the dynamic relationship among them using the vector error correction model. This study found evidence to suggest that cryptos exhibit a co-integrated relationship while there is no evidence of significant cointegrated movements occurring between the cryptos and the market indices. The latter finding implies that cryptos are decoupled from the market indices and can serve as a diversification option for investors. The mean-variance approach confirms that cryptocurrencies fit into an optimal portfolio and involve an enhanced return-risk reward for investors.
In equity trading, internalization is the predominant execution method for uninformed order flow, allowing retail brokers to realize cost savings and thereby offer price improvements to customers. In cryptocurrency trading, there are doubts as to whether informed and uninformed traders can be distinguished in the same way, leading brokers to seek cost savings through internal order matching instead. Using the historical order flow of the German cryptocurrency broker BISON, we present a prediction-based approach to internal order matching: Upon receiving a customer order, our model forecasts whether future order flow will be sufficient to neutralize the order before the settlement date. With a prediction accuracy of 85%, it enables brokers to match three-quarters of order volume internally, which is three times as much as a traditional static approach, and realize meaningful cost savings, even after accounting for common minimum price improvements.
Momentum is one of the most widespread, persistent, and puzzling phenomenon in asset pricing. The prevailing explanation for momentum is that investors under-react to new information, and thus asset prices tend to drift over time. We use a unique feature of cryptocurrency markets: the fact that they are open 24/7, and report returns over the last 24 hours. Thus, the one-day return is subject to predictable fluctuations based on the removal of lagged information. We show that investors respond positively to changes in reported returns that are unrelated to any new release of information, or change in the asset fundamentals. We call this behavioral anomaly "Pure Momentum".
This study uses the DCC-GARCH model to compare the correlation between two types of cryptocurrencies in two different fields.In the context of the popularity of NFTs and the metaverse, new cryptocurrencies based on the metaverse have been favored by investors.Through empirical analysis of mana cryptocurrencies in the NFT market, we find that the new cryptocurrencies in the NFT market have high volatility to Bitcoin, Ethereum, and traditional cryptocurrencies in the past year.Therefore, we conclude that new cryptocurrencies are more likely to be one of the factors for portfolio diversification.
Cryptocurrencies are deemed to be highly influenced and driven by investors' sentiments flowing across social media platforms. Consequently, researchers are attracted to investigate investors' behavioral biases in investing in cryptocurrencies. The existing related research majorly focuses on the investigation with the implementation of questionnaires and surveys. However, to what extent the feedbacks to these questionnaires or surveys truthfully reflect the investors' actual practices in investing in cryptocurrencies is uncertain and dubious. Therefore, in this study, we inspect and appraise the behavioral biases and portfolio properties of cryptocurrency investors by utilizing the on-blockchain (on-chain) information of wallet records directly from the Ethereum network. By retrieving and analyzing the unique wallet addresses and related transactions, we have obtained three behavioral bias proxies of the investors behind the wallets and five different properties of the wallets. Furthermore, we distinguish and analyze the wallets of human investors and trading bots. The results of statistical tests indicate the significant differences between human investors and trading bots on most behavioral biases and wallet properties.
Decentralized Finance (DeFi) is a new financial infrastructure with applications similar to traditional financial products, such as exchange, lending, derivatives, and asset management. This paper empirically investigates Yearn finance, one of the fastest-growing and largest in DeFi yield aggregator protocols for on-chain asset management, to demonstrate the flow-performance relationship and compare it with mutual funds in traditional finance. According to the findings, there is a positive non-linear relationship between fund flows and recent performance for using stablecoin deposited. In contrast, we cannot find this relationship for using cryptocurrency.�Then, we look further into stablecoin holder behaviour and our findings show that, on average, they prefer the leverage strategy, which offers a chance of higher returns. Finally, we examine the event study of internal and external changes to see how investors respond. For the internal changes, the publication of deploying new strategies for both stablecoin and cryptocurrency vault does not affect investors' immediate reaction. However, only stablecoin holders have directly responded to protocol partners' announcement of the partnership�with Yearn finance for external changes.
Shimon Kogan, Igor Makarov, Marina Niessner, Antoinette Schoar
Trading in cryptocurrencies has grown rapidly over the last decade, primarily dominated by retail investors.Using a dataset of 200,000 retail traders from eToro, we show that they have a different model of the underlying price dynamics in cryptocurrencies relative to other assets.Retail traders in our sample are contrarian in stocks and gold, yet the same traders follow a momentum-like strategy in cryptocurrencies.Individual characteristics do not explain the differences in how people trade cryptocurrencies versus stocks, suggesting that our results are orthogonal to differences in investor composition or clientele effects.Furthermore, our findings are not explained by inattention, differences in fees, or preference for lotterylike stocks.We conjecture that retail investors hold a model of cryptocurrency prices, where price changes imply a change in the likelihood of future widespread adoption, which in turn pushes asset prices further in the same direction.
With initial coin offerings and token offerings remaining at the forefront of alternative investments, the study of peer groups can be important for comparing investors’ tastes and preferences for particular classes of cryptocurrency on a more equal footing. The aim of this paper is to identify violations of the weak-form market efficiency hypothesis for comparable cryptoassets that are conditional on market segmentation and those conditional on benchmarks. We use daily frequency data of 57 cryptocurrencies that account for more than 90% of the total market capitalization (market cap). We construct seven thematic market cap indexes that are able to represent the whole cryptocurrency universe. Against this background, we test for the presence of four empirical anomalies: risk premium, leverage, regime switch and calendar effects, both across and within these benchmark indexes. The main results support the existence of a switch between two states and positive excess returns toward the end of the week for both cases. Our methodology and findings contribute to the emerging literature on introducing active and passive portfolio management strategies that track benchmark crypto indexes.
The growth of Cryptocurrency has been considered as a future legitimate tender of currency with great possibilities, and it has contributed to lots of different fronts like investments and forms of trading, on the contrary, has caused several troubles.As virtual currencies are developing rapidly, people should comprehend basic concepts and their global influences of them.Our research paper has included the histories and functions with rules and regulations comprehensively.Our goal is to make sure that the audience understands cryptocurrency by the details and examples given and explore further diversification of critical thinking on the topic.We have retrieved lots of resources from articles, websites, and statistical data and discussed insightful analysis to make sure the accuracy is guaranteed.Our study would be beneficial to people with zero understanding of the concept of cryptocurrency.