Are Cryptocurrencies Homogenous?

Abstract

There exist more than 2000 cryptocurrencies today. Although choices of design and target groups vary across cryptocurrencies, current research primarily focuses on Bitcoin. If the differences in design choices makes cryptocurrencies heterogenous then existing research could be less relevant in explaining how the cryptocurrency market works. Very little is currently known about homogeneity among cryptocurrencies. Therefore, this paper aims to investigate if cryptocurrencies are homogenous. The question of homogeneity among cryptocurrencies is answered via a LASSO-model in which the drivers of returns that have been identified for Bitcoin in the contemporary theoretical framework are applied to a sample of 12 cryptocurrencies, further analysing over time and across design choices of cryptocurrencies. The results show that cryptocurrencies are heterogenous, apart from some similarities in the impact of technical drivers. The cryptocurrency market is highly integrated with evidence of substitution effects. Further, design choices related to demand and supply among cryptocurrencies can in several cases explain the impact of drivers of return. It is important to consider heterogeneity among cryptocurrencies in order to avoid misinterpretation or misdirected regulation of cryptocurrencies.