Summary:
Expected returns of assets are crucial in finance, especially for cryptocurrencies.
Traditional equity pricing factors like size and momentum apply to cryptocurrencies.
Blockchain characteristics enhance understanding of cryptocurrency returns.
New models incorporate on-chain data to explain price movements.
The whale premium indicates a demand for higher returns on less decentralized assets.
Understanding Cryptocurrency Pricing
In the world of finance, one of the most crucial questions is: What drives the expected returns of assets? This inquiry has been explored extensively within equity markets, yet cryptocurrencies present unique challenges due to the absence of balance sheets, making traditional pricing methods less applicable.
Insights from Academic Research
Professor Andrew Urquhart, a notable figure in finance and financial technology, sheds light on this topic in the latest installment of the Professor Coin column. He references a 2022 study conducted by Yukun Liu, Aleh Tsyvinski, and Xi Wu, which examined how traditional equity pricing factors—such as size, momentum, and volatility—apply to over 1,800 cryptocurrencies. Their findings suggest that these factors can effectively explain cryptocurrency returns, indicating that pricing cryptocurrencies could be akin to pricing stocks.
Blockchain Characteristics as Pricing Factors
Further expanding on this, a follow-up paper by Siddharth Bhambhwani and colleagues investigates how blockchain characteristics like computing power and network size influence cryptocurrency returns. Their research demonstrates that these factors can enhance the understanding of cryptocurrency pricing, providing valuable insights beyond traditional market data.
New Models and Factors
A recent study by Athanasios Sakkas and Professor Urquhart introduces 13 new factors derived from on-chain data across more than 35 blockchains. These factors consider elements such as whale holdings, coin movements, and network decentralization. Their model reveals that a straightforward approach, incorporating market excess returns and the distribution of the network, can better explain cryptocurrency returns than previous models. Notably, they highlight the "whale premium", indicating that investors demand a higher return for holding less decentralized cryptocurrencies.
Conclusion
Overall, the evolving landscape of cryptocurrency pricing reflects its complexity and the increasing importance of blockchain data. By leveraging this information, investors can gain deeper insights into predicting the future value of cryptocurrencies.
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