Common Risk Factors in Cryptocurrency
Read the paperopens doi.org in a new tab
What they found
Extending their earlier work to the cross-section of over 1,800 coins from 2014 to 2020, the authors tested 25 characteristics borrowed from the stock market literature. Three factors explained the cross-section: a crypto market factor, a size factor (small coins earned more than large), and a momentum factor (coins with high past 1 to 4 week returns earned more). This mirrors the structure of stock returns, and the momentum effect was strong and robust. Other characteristics, such as volume and volatility, were subsumed by these three factors.
What you can use
- Crypto has a factor structure like stocks: a market factor, a size effect, and short-term momentum explain most cross-sectional returns.
- Small coins have had higher average returns, but with extreme risk and illiquidity, exactly like microcap stocks.
- Momentum in crypto operates at a horizon of weeks, much shorter than the months-long horizon in stocks.
Caveats
Small coins are illiquid and returns are gross of the large costs of trading them; survivorship in coin data is a concern. Sample ends 2020. Free NBER version exists.
Tags: crypto, factor-model, size, momentum
Summaries are our own reading of the paper, not the authors' words. Educational only, not advice. Discuss it in Book Club.