5 Cryptocurrency Insights | Simon Business School
5 Cryptocurrency Insights | Simon Business School
Lengthy gone are the times when cryptocurrency was the realm of hobbyists and teachers.
In early March, the Ukrainian authorities made headlines for spending $15 million of donated cryptocurrency on navy provides. In keeping with authorities officers, about 40% of U.S. and European suppliers of meals packages, protecting gear, and different navy tools settle for cryptocurrency. That minority will swiftly turn into a majority within the years forward. In keeping with a latest research, the dimensions and share of the worldwide cryptocurrency market is on a projected growth trajectory from $1.44 billion in 2020 to $2.73 billion in 2025 at a compound annual progress charge of (CAGR) of 13.8%.
At Simon Enterprise Faculty, we’re lucky to have college members like Yukun Liu, an assistant professor of finance, to unpack rising points and questions surrounding cryptocurrency. Since Professor Liu joined us from Yale in 2019, he has performed research that goes deeper into the dangers and rewards of cryptocurrency markets.
Listed here are 5 insights gleaned from his analysis:
1) Cryptocurrency doesn’t behave like another asset class.
One of many elementary questions that Liu addresses in his analysis is that this: What sorts of asset class is cryptocurrency? Is it a retailer of worth, like gold, or is it extra like a inventory? In a single latest paper, Liu and his co-authors determine frequent components that affect returns of shares, valuable metals, currencies, and different asset courses. They anticipated to search out a number of components which may predict cryptocurrency returns, corresponding to the price of mining (the value of manufacturing cryptocurrency), volatility, and price-to-dividend ratio (analyzing the value of the asset in comparison with earnings). To their shock, they discovered that just about not one of the frequent components that affect returns have any bearing on cryptocurrency returns. Cryptocurrency is in a lane of its personal, and customary narratives about the way it behaves like shares or foreign money or another conventional asset class are flawed, says Liu.
2) Asset pricing instruments can nonetheless make clear cryptocurrency efficiency.
Whereas cryptocurrency behaves otherwise from different asset courses, researchers can use conventional asset pricing instruments to foretell that habits. The primary useful software that Liu suggests is named the momentum impact, which says that when an asset will increase in worth, it’s prone to proceed an upward pattern—identical to different asset courses. In gentle of this actuality, Liu recommends that traders purchase Bitcoin if its worth will increase greater than 20% within the earlier week.
The second software that may assist clarify cryptocurrency habits is the extent of investor consideration. In his analysis, Liu investigated this query: “If there’s an abnormally excessive variety of mentions of the cryptocurrencies we studied, both by Google search or on Twitter, will these cryptocurrencies’ returns improve?” Liu discovered that they’ll. Based mostly on historic knowledge, a rise of 1 normal deviation within the Twitter submit depend for the phrase “Bitcoin” yields a 2.5% improve within the 1-week forward Bitcoin returns. On the flipside, unfavorable investor consideration, like using phrases like “Bitcoin hack,” results in unfavorable returns.
3) Cryptocurrency is disrupting some industries however not others.
Cryptocurrency, by nature, is a disruptive pressure—nevertheless it influences inventory returns in sure industries greater than others. Liu examined 354 industries within the U.S. and 137 industries in China to grasp how particular markets reply to the presence of cryptocurrency. Based mostly on this analysis, he and his co-authors have been in a position to produce an index of the potential disruptive results of cryptocurrency on each main trade. They discovered that whereas healthcare and client items industries reply positively to publicity to Bitcoin, there isn’t a connection between Bitcoin and finance, retail, and wholesale industries.
4) Cryptocurrency is extra prone to collapse than different asset courses.
From Liu’s perspective, it’s cheap to contemplate the chance that the worth of cryptocurrencies like Bitcoin will fall to zero and collapse in a single day. Based mostly on the historic efficiency of cryptocurrency, that likelihood is 0.3%. That quantity is way too low to maintain most traders awake at evening, nevertheless it’s considerably better than the chance of different crashes: 0.0009% for the Euro, 0.003% for the Australian greenback, and 0.005% for the Canadian greenback.
5) Human nature stays predictable.
The common cryptocurrency investor might not match the profile of the common investor however Liu’s analysis reveals that the identical psychological and sociological forces at play in conventional markets are additionally at play within the cryptocurrency market, such because the inevitable attraction to shares which might be already going up. Digital know-how might change, however human nature stays the identical.
To study extra about Professor Liu’s cryptocurrency analysis, go to https://www.yukunliu.com/analysis/.