Buzz Factor or Innovation Potential: What Explains Cryptocurrencies’ Returns?

Abstract

Cryptocurrencies have become increasingly popular since the introduction of bitcoin in 2009. In this paper, we identify factors associated with variations in cryptocurrencies’ market values. In the past, researchers argued that the “buzz” surrounding cryptocurrencies in online media explained their price variations. But this observation obfuscates the notion that cryptocurrencies, unlike fiat currencies, are technologies entailing a true innovation potential. By using, for the first time, a unique measure of innovation potential, we find that the latter is in fact the most important factor associated with increases in cryptocurrency returns. By contrast, we find that the buzz surrounding cryptocurrencies is negatively associated with returns after controlling for a variety of factors, such as supply growth and liquidity. Also interesting is our finding that a cryptocurrency’s association with fraudulent activity is not negatively associated with weekly returns—a result that further qualifies the media’s influence on cryptocurrencies. Finally, we find that an increase in supply is positively associated with weekly returns. Taken together, our findings show that cryptocurrencies do not behave like traditional currencies or commodities—unlike what most prior research has assumed—and depict an industry that is much more mature, and much less speculative, than has been implied by previous accounts.

Risks and Returns of Cryptocurrency

“…Wang and Vergne (2017) use the level of newspaper mentions of Bitcoin to proxy for the "buzz" of Bitcoin. They document that high "buzz" predicts low Bitcoin returns in the future Mai et al (2016).…”

Are Cryptocurrencies Affected by Their Asset Class Movements or News Announcements?

“…This notion was supported by Bouoiyour and Selmi (2015), who also found BTC to be a speculative bubble rather than being related to market forces. Wang and Vergne (2017) used newspaper mentions of BTC as a proxy for "buzz" and found that high "buzz" was followed by low BTC returns. On the other hand, Van Wijk (2013) focussed on macroeconomic factors, such as stock market indices, oil prices and exchange rates, and found that certain foreign currency pairs, such as Euro/USD and oil prices, share significant relationships with BTC in the long run.…”

Wikipedia and Cryptocurrencies: Interplay Between Collective Attention and Market Performance

“…Although cryptocurrencies were first introduced as a media of exchange for daily payments (Ali et al, 2014), they are increasingly used for speculation (Glaser et al, 2014). Cryptocurrencies can be traded in online exchange platforms and extensive research has looked at the nature and main usages of Bitcoin, specifically in the hope of finding some hints on the price drivers (Kristoufek, 2015;Ciaian et al, 2016;Elendner et al, 2016;Gandal and Halaburda, 2016;Wang and Vergne, 2017;Gajardo et al, 2018;Guo and Antulov-Fantulin, 2018). Comparisons between cryptocurrencies exchange market and the stock market (Ali et al, 2014;Ceruleo, 2014) or fiat currencies (Yermack, 2013) have been drawn, in an attempt to rationalize the market and its price movements.…”