Investments in Cryptocurrencies:
Handle with Care!
Tobias N. Glas
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Tobias N. Glas ABSTRACT: Asset pricing models and invest-
is a PhD candidate in the ment styles have been researched intensively in
Department of Finance
equities, bonds, FX, and commodities. However, a
at the University of
Bremen, in Bremen, new asset class has emerged since the end of 2008,
Germany. namely, cryptocurrencies such as Bitcoin and Ethe-
glas@uni-bremen.de reum, among others. The author uses an extensive
data set of over 1,500 cryptocurrencies and shows
that almost none of the traditional investment styles
such as momentum or defensive appear to be suc-
cessful in this young asset class. Cryptocurrencies
are also independent from the macroeconomic envi-
ronment and cannot be explained by a standard
asset pricing model. A cryptocurrency specific model
yields clearly better results. In addition, the whole
cryptocurrency space is dominated by only a few
individual digital coins. Equally weighted mean
monthly returns appear to be random with low or
even no correlation with traditional asset classes
such as US equities and global FX.
TOPICS: Real assets/alternative investments/
private equity, performance measurement,
portfolio management/multi-asset allocation*
T
oday, practically everyone is
talking about Bitcoin (BTC), the
very first blockchain-based digital
payment alternative. Media com-
panies such as Bloomberg and the Financial
*All articles are now Times constantly report about new record
categorized by topics highs achieved by the digital currency.
and subtopics. View at
Alone in 2017, the value of BTC surged by
IPRJournals.com.
more than 1,000%. Originally introduced
96   Investments in Cryptocurrencies: H andle with Care!
by Nakamoto (2008), which is assumed to
be a code name for the Australian entrepre-
neur and software developer Craig Steven
Wright, BTC is more than a digital coin.
Its technological foundation, the blockchain,
has been adopted by several other projects
or coins, banks, and many more institu-
tions. The whole cryptocurrency universe
hit a total market value of over 500 billion
USD on December 13, 2017, for the first
time. Compared with other asset classes, the
cryptocurrency space is rather small. Apple
Inc. alone, for example, was worth about 900
billion USD at the same time. When looking
at the trading volume of the worldwide FX
market with a daily value equivalent to c. 5
trillion USD, cryptocurrencies seem like a
dwarf. However, the stellar performance of
BTC and other cryptocurrencies attracts pri-
vate as well as institutional investors and also
academics. The introduction of BTC futures
on three big American exchanges (CME,
CBOE, and NASDAQ), the growing adop-
tion of blockchain technology, and a steadily
maturing cryptocurrency market require a
deeper understanding of this matter, espe-
cially to succeed as an investor.
The existing literature covering this
topic particularly from an investment per-
spective is rather limited. That is why the aim
here is to (1) give a first impression about the
basics of this emerging asset class, (2) explore
a potential link between cryptocurrencies
Summer 2019
 and traditional asset classes, and (3) explore the
effectiveness of investment styles in this young asset class.
We make use of an extensive data set containing
over 1,500 cryptocurrencies at the end of February 2018
and arrive at the following findings:
First, the whole cryptocurrency universe appears to
be driven by the performance of only a few digital coins
and produces more or less random mean monthly returns.1
Controlling for the performance of BTC diminishes the
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returns of all other cryptocurrencies. By further inves-
tigating cryptocurrency returns through Fama–French
regressions we arrive almost at a complete indepen-
dence from traditional equity markets. We also test the
dependency of cryptocurrencies on the macroeconomic
environment, which is the driving force behind global
FX markets, and find again no relationship between the
two. Applying a more cryptocurrency-specific regres-
sion model leads to much better results. Second, almost
none of the five investigated investment styles or strate-
gies yield sufficient and robust results. We find evidence
only for possible short-term reversal, illiquidity, and size-
characteristic premia. These results lead to the conclusion
that traditional capital market mechanics cannot (yet)
be applied to cryptocurrency markets. Thus, investors
should treat this young asset class with care.
This article is structured in the following way. The
second section summarizes relevant literature, and the third
presents the data sources used. The fourth section gives
an overview of the cryptocurrency space from an inves-
tor’s point of view. The cryptocurrency returns are further
investigated in the fifth section by a standard asset pricing
model. The sixth section details the macroeconomic impact
on cryptocurrencies, which is known as the major driver of
global FX markets. The seventh section explores first invest-
ment styles, and the eighth introduces a possible cryptocur-
rency-specific regression model based on the findings from
the seventh section. The final section offers conclusions.
RELATED LITERATURE
Investment styles usually describe a dollar- or
market-neutral portfolio that is constructed by going
long the assets within a given investment opportunity set
1
On November 23, 2017, Bitcoin, Ethereum, and Bitcoin
Cash alone made up 79% of the total cryptocurrency market
capitalization (with over 1,000 active cryptocurrencies in total).
The largest 10 digital coins accounted for about 90% of the total
market cap.
Summer 2019
with some very distinct characteristic and shorting assets
with the least distinct characteristic. Nearly any char-
acteristic or proxy, like return information, accounting
ratios, or other variables can be used as sorting criteria.
By sorting for a given characteristic several percentiles
are considered. These can range from 2 up to 10 or
more percentiles. The assets within each percentile
are equally-weighted or value-weighted to arrive at a
corresponding portfolio. Thus, the hedge portfolio is
formed from the “best” (e.g., high momentum) and the
“worst” (e.g., low momentum) portfolios that represent
the respective characteristic or investment style.
Literature on the cryptocurrency universe with
regard to financial applications or the above-mentioned
characteristics is still rather limited because of its young
history. El Bahrawy et al. (2017) are among the first to
investigate the whole cryptocurrency space. They find
a stable number of actively2 traded cryptocurrencies,
a stable distribution of the market share, and a stable
rank turnover. They also detect no “selective advantage”
of one cryptocurrency over another. We find only a
handful papers that are related to our approach. Hubrich
(2017) explores the investment styles momentum, value,
and carry in a set of 11 digital coins. He arrives at the
conclusion that all three characteristics exist in the
applied data set. However, the data suffer from a sig-
nificant survivorship bias since those 11 coins are part
of the largest and most important ones today. Also, the
construction methodology of the styles departs from
the known literature. Rohrbach et al. (2017) explore
momentum within several asset classes, including cryp-
tocurrencies. They find a strong time-series as well as a
cross-sectional momentum effect in seven digital coins.
Here again, their data set includes only large coins with
a tremendously positive performance. Other studies
focus on the benefits of cryptocurrencies in a multi-
asset framework. Chuen et al. (2018) include the CRIX
index, an index for cryptocurrencies, in a portfolio made
up of stocks, private equity, REITs, and gold. The inclu-
sion of the CRIX index leads to an upward shift of
the efficient frontier in a mean–variance framework.
They also document a successful investment strategy
for cryptocurrencies based on news sentiment. Coli-
anni et al. (2015) as well conclude that the news senti-
ment on Twitter can predict the price of BTC. Research
2
A list of “dead” cryptocurrencies can be found at http://
deadcoins.com/.
The Journal of Alternative Investments   97
 regarding investment styles and the drivers of returns
is often found for traditional asset classes such as stocks
and FX. Also, macroeconomic analysis is an explanation
for the return behavior of traditional asset classes. Since
the nature of cryptocurrencies is not clear, some refer
to them as equity, debt, commodity, or of course FX,
we compare the cryptocurrencies from our analysis with
equities and FX to explore co-movements or differences.
It has been shown by several studies that investment
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styles such as momentum, defensive, value, illiquidity,
and size work especially well in equities but also in other
asset classes. Prominent examples for a multi-asset evalu-
ation are Asness et al. (2013, 2015). Both works show
successful investment styles in multiple asset classes.
Works focusing on equities only are manifold. Just to
mention a few, Fama and French (2012) document suc-
cessful momentum and value styles in international
stocks but a nonexistent size effect. Hou et al. (2011)
arrive at the same conclusion for momentum and value
in an international context. Fama and French (1998)
focus on value only and find a spread of 7.68% between
global value and growth stocks per year. Defensive,
which is often measured by low beta or low volatility,
has also been shown to be a profitable style in interna-
tional stocks (see Frazzini and Pedersen 2014; Blitz and
van Vliet 2007; Ang et al. 2006). Amihud et al. (2015)
and Chiang and Zheng (2015) show a connection
between expected returns and illiquidity. Reversal,
which was originally found by De Bondt and Thaler
(1985), proposes higher expected returns for loser stocks
from the past five years. In addition, short-term reversal,
which buys loser stocks from the last month, appears to
earn significant returns. Groot et al. (2012) document
a significant short-term reversal effect in the United
States and Europe after controlling for transaction costs.
Jegadeesh and Titman (1995) explain short-term reversal
in the United States by dealer-inventory-related market
microstructure effects. Successful short-term reversal
effects have also been shown by Schiereck et al. (1999),
Chang et al. (1995), and Hameed and Ting (2000).
Investment styles in foreign exchange rates have
not been studied as intensively as in equities. The most
prominent investment style in the FX space, however,
might be carry. The carry trade exploits the interest rate
differential between two countries by borrowing funds
in the country with lower interest rates and investing
the proceeds in the country with higher interest rates.
Assuming a stable exchange rate, carry should yield a
98   Investments in Cryptocurrencies: H andle with Care!
risk-less return (see Koijen et al. 2018 and Brunnermeier
et al. 2008). Menkhoff et al. (2012a) report a stark
momentum effect in exchange rates that is supported
by Burnside et al. (2011) and Harris and Yilmaz (2009).
Barroso and Santa-Clara (2015) and Kroencke et al.
(2013) explore multiple successful investment styles in
the FX universe, namely, carry, momentum, and value
(reversal).
The described investment styles cannot only be
found in different asset classes, but they also appear
to be driven by similar macroeconomic variables (see
Chordia and Shivakumar 2002; Cooper et al. 2017;
Liu and Zhang 2008; Arshanapalli et al. 2010). The
effect of the macroeconomic environment/news has
been shown to affect stock returns in general (see,
e.g., Chen et al. 1986; Flannery and Protopapadakis
2002; Birz and Lott 2011; Lahaye et al. 2010; and
Scotti 2016). The same applies to exchange rates (see,
e.g., Faust et al. 2007; Mun 2012; Andersen et al. 2007;
Fatum et al. 2012). Liew and Vassalou (2000), however,
argue that investment styles can predict the change in
US gross domestic product (GDP) growth.
Since investment styles work in nearly every asset
class and macroeconomic news/announcements signifi-
cantly affect equities, exchange rates, and investment
strategies, we aim to investigate similar effects in the
young and emerging asset class of cryptocurrencies.
Therefore, we first report the performance metrics of a
simple buy-and-hold strategy in cryptocurrencies. After
some asset pricing tests that aim to show the related-
ness of cryptocurrencies to equities or FX, we explore
the macroeconomic risk exposures of cryptocurrencies.
Afterward, we compare the performance of investment
styles based on cryptocurrencies with the performance
of investment styles in equities and FX markets. On
the basis of these findings and inspired by the work of
Fama and French (1993), we introduce a novel regression
model that includes cryptocurrency-specific factors as
independent variables.
DATA
Our main sources for cryptocurrency data are
the freely available BTER data set from quandl 3 and
coinmarketcap.com.4 More common data vendors such
3
https://www.quandl.com/data/BTER-BTER.
4
https://coinmarketcap.com/all/views/all/.
Summer 2019
 Exhibit 1
Data Composition

1RRI 3DQHO &U\SWR )LDW 3DQHO 3DQHO 3DQHO

$VVHWV $OO  ± 4XRWH 4XRWH $OO  ± (TXLWLHV ); $OO
0LQLPXP           
0D[LPXP           
$YHUDJH           
3RVLWLYH            
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1HJDWLYH            

Notes: Min, max, and average describe the minimum, maximum, and average number of assets over time. Panel 1 includes the quandl.com/BTER data,
Panel 2 contains coinmarketcap.com data, and Panel 3 comprises the traditional asset classes US equities and global FX. Panel 4 includes the five largest
digital coins at the end of April 2013 to avoid a selection/lookahead bias. These are BTC, Litecoin (LTC), Peercoin (PPC), Namecoin (NMC), and
Terracoin (TRC). The term “all” means that all available assets are included in the respective data set. “+” (“-”) indicates we are using only assets with
positive (negative) mean monthly returns. “Crypto quote” includes all currencies with another cryptocurrency as quote currency, and “fiat quote” takes
USD or CNY as quote currency. Positive (negative) states the number of assets within each data set with positive (negative) mean monthly returns in (%).

as Bloomberg or Datastream include, if any, only a limited
number of digital coins with shorter data coverage. The
quandl data set includes N = 152 different cryptocurrency
pairs from one of the first cryptocurrency exchanges
based in China. As a result of regulatory restrictions
imposed by the Chinese government, BTER had to
cease operations by October 31, 2017. Thus, we obtain
daily data from the beginning of April 2014 (which is
the date with the earliest available data) to the end of
October 2017, which results in t = 1,256 days. For return
calculations we down-sample the daily data to end-of-
month data (T = 43 months). From coinmarketcap.com,
the leading cryptocurrency data website, we hand-col-
lect all available cryptocurrencies (N = 1,525) on Feb-
ruary 28, 2018. The data start from the end of April
2013 and end at the end of February 2018 (t = 1,768
days or T = 59 months). We exclude values that have
not changed during the course of three months from the
fourth month on. We do not account for other possible
data errors since research regarding issues in such data
is not yet existent. To account for extreme values and
outliers we apply three different adjustment methods as
described in the investment style section. The currency
pairs from the quandl data set either have a cryptocur-
rency as quote currency or a traditional currency such as
USD or CNY. Coinmarketcap.com data are completely
made up of cryptocurrencies vs. USD. A full list of all
currency pairs can be found in the appendix (online). In
the course of this work we split the data into three panels
with 11 data sets in total. Since the crypto universe is
dominated by a few individuals, we construct a fourth
panel including the five largest digital coins at the end
of April 2013 to avoid a selection/lookahead bias. These
are BTC, Litecoin (LTC), Peercoin (PPC), Namecoin
(NMC), and Terracoin (TRC).
We reference the cryptocurrency data panels to
traditional asset classes such as US equities and global
FX (see Exhibit 1 for more information). Therefore,
we obtain data for the S&P 500 stocks from Datastream
(we use the S&P 500 constituent list) within the same
period of time as the cryptocurrency data panels, which
is April 2013 to February 2018. We also download the
spot and forward exchange rates of the world’s 50 largest
countries as measured by GDP against the USD from
WM/Reuters.5 Because of the European single currency
this data set contains 39 currency pairs on average.
For non-deliverable forwards (NDFs) we download the
overnight rate. We do not exclude pegged currencies.
We approximate the monthly FX excess return for a US
investor holding the foreign currency k as rkt+1 ≈ ft k - skt+1,
with s as the spot and f as the one-month forward
rate, measured in foreign currency units per USD (see
Menkhoff et al. 2012b).
The macroeconomic variables for the calcula-
tion of macroeconomic risk exposures are obtained
from Thomson Reuters Datastream. The US Fama
and French (2015) factors for the asset pricing test are
retrieved from Kenneth French’s website.6
5
We obtain information for the world’s 50 largest countries
by GDP in 2016 from the IMF’s world economic outlook database.
6
http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/
Data_Library/f-f_5developed.html.

Summer 2019 The Journal of Alternative Investments   99

 Exhibit 2
Performance Metrics of Cryptocurrencies Compared with US Equities and FX

0HDQ 5HWXUQ
3DQHOV UEK  UEKPHG   W6WDW S9DOXH 6'  5LVN 6NHZQHVV .XUWRVLV ρ
3DQHO
$OO (:  ± ± ±   ±   ±
          
±  ± ± ±   ±   ±
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&U\SWR4XRWH  ± ± ±   ±   ±
)LDW4XRWH  ± ± ±   ±   
3DQHO
$OO (:   ± ±   ±   
$OO 9: ± ±        
$OO 0: ± ±        
          
± ± ± ± ±   ±   
3DQHO
(TXLWLHV        ±  
);        ±  
3DQHO
$OO (:          
$OO 9: ± ±        
$OO 0: ± ±        
%7&  ±        ±
/7&  ±        ±
33&  ±        ±
10&  ±        ±
75& ± ± ± ±   ±   ±

Notes: All(EW), All(VW), All(MV) correspond to the data sets including all available digital coins as equal-, volume-, or market cap–weighted portfolios.
rbh is the average discrete return when buying every included asset at its first available price and holding it until its last available price. Since the cryptocur-
rencies do not share the same data history (in terms of length), the buy-and-hold returns are calculated over different periods of time and then averaged to rbh.
The same applies to rbhmed, which is the median discrete buy-and-hold return. Mean (%) describes the average mean monthly return of all available virtual
coins within one data set averaged over all available observations in (%). Here, we equally-weight all available cryptocurrencies every month to arrive at
a monthly “market portfolio.” Subsequently, we average all monthly “market portfolio” returns to arrive at the mean monthly return stated in the table.
T-stat is the respective t-statistics with the null hypothesis of an average return equal to 0 and the corresponding p-value. Standard deviation (SD) reports
the volatility in (%). Return/risk is calculated as the mean return/standard deviation. Skewness and kurtosis are the third and fourth moments of the
monthly returns. ρ is the average correlation between all assets.

INVESTING IN CRYPTOCURRENCIES
To get a first glimpse at this young asset class
of cryptocurrencies we report standard performance
metrics compared with the traditional asset classes,
US equities and FX. Exhibit 2 shows the buy-and-
hold return, mean monthly return, standard deviation,
reward/risk ratio, skewness, and kurtosis for all data sets.
We also split the cryptocurrencies into three panels.
The first panel includes data from the cryptocurrency
exchange BTER, and the second includes data from
coinmarketcap.com. The fourth panel comprises the
five largest cryptocurrencies from Panel 2. Panel 1 is
further divided into data sets including all available
currencies and data sets made up of currencies that
yield only positive mean monthly returns or negative
mean monthly returns over the full sample length.
This is to examine a possible differing investment style
behavior in a later section and is meant solely for descrip-
tive purposes. We also apply two data sets with USD

100   Investments in Cryptocurrencies: H andle with Care! Summer 2019

 Exhibit 3
Histogram of the Discrete Buy-and-Hold Returns
in Panel 1



1XPEHURI$VVHWV
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±        
5HWXUQLQ
or CNY as quote currency or other crypto coins as
quote currency. The quote currency of all assets of the
coinmarketcap.com panel is USD. Furthermore, we
divide the whole data set into positive and negative mean
monthly return cryptocurrencies only. In Panels 2 and 4
we also use three different weighting methodologies.
Here, we calculate equally-weighted, volume-weighted,
and market-cap-weighted returns based on all available
assets in the respective panel. Such an approach cannot
be used for Panel 1 because of inconsistent data.
Looking at Exhibit 2, two circumstances become
apparent. First, the mean monthly cryptocurrency
returns seem to be completely random. Considering the
mostly insignificant t-values and high standard devia-
tions, the mean monthly returns are very low (close
to 0%), which translates into independent movements
of all cryptocurrencies, which average themselves out.
Second, the cryptocurrency universe appears to be
dominated by just a few digital coins, resulting in high
average buy-and-hold returns.7 When the USD prices
from Panel 2 are converted to BTC prices (which are
not reported in Exhibit 2), the whole universe produces
7
The maximum return in Panel 1 can be found at
4,486,446.06% and in Panel 2 at 10,333,233.33%. Therefore,
we winsorize the data to arrive at more conservative results by
excluding the top and the bottom 1% of the return data.
Summer 2019
Exhibit 4
Histogram of the Discrete Buy-and-Hold-Returns
in Panel 2



1XPEHURI$VVHWV





  ±          
î 5HWXUQLQ î
a mean monthly return of -7.89% and a buy-and-hold
return of 129.75% (-46.85% median).8
The third moment of all cryptocurrency data sets,
however, is positive. Average correlations within each
data set are also comparably low, which supports the
argument of independent short-term movements. This
finding however, does not hold for Panel 4. The five
largest cryptocurrencies are highly correlated in this
case. The clearly higher skewness measures and stan-
dard deviations in Panel 2 might be explained by the
data collection methodology applied by coinmarketcap.
com. The website collects price information from dif-
ferent exchanges and volume-weights it to arrive at an
average price. The prices on the different exchanges,
however, are often quoted in BTC or other altcoins and
that is why they need to be converted to USD again.
Thus, prices in Panel 2 involve at least two highly vola-
tile cryptocurrencies, leading to increased standard
deviations. Exhibits 3 and 4 show the distribution of the
(for illustrative purposes winsorized) discrete buy-and-
hold returns in Panels 1 and 2. Both plots depict a high
positive skewness as indicated in Exhibit 2. However,
both panels are driven by only some few virtual coins
8
By doing so, the picture changes drastically. The average
buy-and-hold return for all available cryptocurrencies in Panel 2
decreases to 129.75% (-46.85% median). The “+” data set yields
324.98% (-3.02% median) and the “-” data set reduces to -62.65%
(-84.15% median).
The Journal of Alternative Investments   101
 Exhibit 5
Boxplot of the Unadjusted Mean Monthly Log
Returns in Panel 1 and Panel 2


0HDQ0RQWKO\/RJ5HWXUQVLQ


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±
±
 
'DWD3DQHOV
with extreme returns. The vast majority lies in the range
between -100% and +100%.
Exhibit 5 contains the mean monthly log returns
of the (non-winsorized) Panels 1 and 2 in the form of
a boxplot.
Here, the higher standard deviation of mean
monthly log returns in Panel 2 becomes apparent again.
The returns are also distributed relatively closely around 0.
In general, the risk associated with cryptocurrencies (in
Panels 1 and 2) is not rewarded sufficiently, resulting in
very low return/risk ratios. The positive skewnesses and
low average correlations, however, might be arguments
in favor of cryptocurrencies.
In a multi-asset framework the inclusion of cryp-
tocurrencies can yield tremendous diversification poten-
tial. Exhibit 6 reports the correlations between the data
sets from Panels 1 and 2, including all available assets, US
equities, global FX quoted against the USD, and Panel 4.
As expected, Exhibit 6 shows a high correlation between
the cryptocurrency panels.9
The cryptocurrencies are also almost uncorre-
lated to US equities but inversely correlated to global
exchange rates. This finding is especially surprising since
Panel 2 and global FX are both quoted against the USD.
Thus, an allocation of cryptocurrencies to a portfolio
9
The correlation between Panels 1 and 2 remains at c. 60%
when Panel 2 is converted to BTC prices.
102   Investments in Cryptocurrencies: H andle with Care!
of traditional asset classes might increase diversification
(see, e.g., Chuen et al. 2018).
ASSET PRICING IMPLICATIONS
To investigate whether cryptocurrencies are con-
nected to US equity markets, they should be explained
by a standard asset pricing model. Thus, we regress the
cryptocurrency returns against the Fama–French (FF)
five-factor-model (see Fama and French 2015):
rit = α i + βi ( Rmt − R ft ) + siSMBt + hi HML t
+ ri RMWt + c iCMAt + εit (1)
with rit being the return of cryptocurrency i at time t, the
abnormal return a and the market b with regard to the
value-weighted excess return of the US market portfolio
(Rmt - Rft). SMB mimics the US size factor, HML proxies
the US value factor, RMW represents the US profit-
ability factor, CMA as the US investment factor and ε
represents the regression residuals.
Here, we focus on the data sets including all avail-
able assets, to draw conclusions that are as general as pos-
sible. Data sets or portfolios composed solely of positive/
negative performing cryptocurrencies were meant for
descriptive purposes only. In Exhibit 7 we report the FF-
regression results against the US factors market (MKT),
size (SMB), value (HML), profitability (RMW), and
investment (CMA).
The FF-f ive-factor model is not capable of
explaining the performance of the cryptocurrencies
in Panels 1 and 2. The (adjusted) R 2 values yield low
to negative values without clearly significant factors.
Equities, however, can be explained well by the FF-five-
factor model. Also, the mean monthly FX returns are
inversely dependent on the market factor as already
described in Exhibit 6. Surprisingly, Panel 2, which is
quoted against the USD, shows no dependency on MKT
at all. Panel 4, which includes the five largest cryp-
tocurrencies from Panel 2 by market capitalization, is
in line with the results from Panels 1 and 2. Applying
asset pricing models from different regions and/or asset
classes on another asset class, however, has been shown
to generate much larger pricing errors (see, e.g., Hou
et al. 2011 and Fama and French 2012).
Next, we apply the FF-five-factor regressions not
only on an aggregated level but also on a single crypto-
currency level. This means we run the same regression
Summer 2019
 Exhibit 6
Multi-Asset Correlation Matrix

ρ Panel 1 (all) Panel 2 (all) US Equities Global FX Panel 4 (all)

Panel 1 (all) 1 0.7500 0.1234 –0.2690 0.5034
Panel 2 (all) 1 0.1295 –0.0480 0.9363
US Equities 1 –0.3122 0.1500
Global FX 1 –0.1208
Panel 4 (all) 1
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Note: This exhibit reports the correlation coefficients between the equally-weighted returns of the stated asset classes with regard to the respective available
time period.

Exhibit 7
Asset Pricing Regressions

'DWD $OSKD 0.7 60% +0/ 50: &0$ 5 $GM5

3DQHO
$OO (: ± ± ± ±   ± ±   ± ±  ±
3DQHO
$OO (: ± ±     ± ±      ±
$OO 9:       ± ±   ± ±  
$OO 09       ± ±   ± ±  ±
3DQHO
(:(TXLW\5HWXUQV ± ±     ± ± ± ±    
(:);5HWXUQV   ± ±     ± ± ± ±  
3DQHO
$OO (:       ± ±      ±
$OO 9:     ± ± ± ±   ± ±  ±
$OO 09 ± ±   ± ± ± ± ± ± ± ±  ±
%7&     ± ± ± ±   ± ±  ±
/7&       ± ±   ± ±  ±
33&       ± ±      ±
10& ± ±     ± ±      ±
75& ± ±     ± ±      ±

Notes: All(EW), All(VW), and All(MV) correspond to the data sets including all available digital coins as equal-, volume-, or market cap–weighted port-
folios. MKT, SMB, HML, RMW, and CMA are the Fama–French five factors downloaded from Kenneth French’s website. T-statistics in parentheses
are stated to the right of the respective coefficient. (Adj.) R 2 is in %. *** indicates significance at the 1% level, ** indicates significance at the 5% level,
and * indicates significance at the 10% level. The time frame of the FF regressions in Panel 1 ranges between April 2014 and October 2017. The period
of time investigated for Panels 2 and 4 begins in April 2013 and ends with December 2017 (due to the availability of the FF factors at the time of writing).
Panel 3 also uses the same period of time from April 2013 to December 2017.

model against the return series of every virtual coin
included in Panels 1 and 2 (see Exhibit 8). Here, we
cannot find a particular significant factor that leaves the
use of an equity asset pricing model for cryptocurrencies
with doubt.
The above-mentioned f indings, however,
still lead to the conclusion that the cross-section of
cryptocurrencies is independent from equity markets,
which might also explain the somehow unexpected
investment style outcomes included in a later section.
Since there seems to be no connection to equity markets,
we change the focus on a possible connection to FX
markets. The driving force behind global FX markets is
the macroeconomic environment, which is investigated
further in the next section.10
10
See, for example, Faust et al. (2007), Mun (2012), Andersen
et al. (2007), and Fatum et al. (2012).

Summer 2019 The Journal of Alternative Investments   103

 Exhibit 8
Significant Coefficients Complete Universe (1)

'DWD 6LJQLILFDQFH $OSKD 0.7 60% +0/ 50: &0$

3DQHO
$OO /HYHO      
/HYHO      
/HYHO      
3DQHO
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$OO /HYHO      

/HYHO      
/HYHO      

Notes: The values in the exhibit are percentage values describing the number of significant coefficients with respect to the whole investment opportunity set.
Thus, a value of 3.29 can be read as “3.29% of all coefficients of alpha in Panel 1 are significant at the 10% level.”

MACROECONOMIC RISK EXPOSURES looking at the complete investment universe, it emerges

We, therefore, run a time-series regression (similar
to Asness et al. 2013) of the cryptocurrency returns on
several macroeconomic variables:
rit = α i + c iConsumptionGrowtht + g iGDPt
+ βi Markett + tiTERM t + di DEFt + εit
with ConsumptionGrowth as the short-term (one-month)
growth rate of US non-durable real consumption and
GDP as the quarterly US GDP growth rate. Market
describes the monthly excess returns of the MSCI world
index over the T-bill. The Fama and French (1993) bond
factors TERM and DEF are the spreads between 10-year
US government bonds and the T-Bill and the default
spread between US corporate bonds and US government
bonds, respectively. Exhibit 9 includes the regression
results, which do not show clear macroeconomic depen-
dencies. Only GDP growth and the bond factor TERM
exhibit significant coefficients. The findings from Panel
1 and Panel 2 are almost the same (in terms of coefficient
signs), which is surprising since the panels are quoted
against different currencies. The data from Panel 1
also stems from a Chinese exchange with a majority of
Chinese investors/traders who might be more sensitive
to the Chinese macroeconomic environment than to
the US macroenvironment. The outcomes from Panel 3,
however, are in line with the findings from Exhibits 6
and 7. Panel 4 naturally is in line with Panel 2.
Analogous to the previous section, we run the
same regression model again with respect to every
single digital currency included in Panels 1 and 2. When
that GDP is a less significant variable in explaining cryp-
tocurrency returns (see Exhibit 10). The Fama–French
bond factors TERM and DEF appear to be more sig-
nificant in Panel 2, which might be due to the quotation
against the USD. Both factors, however, perform worse
in Panel 1.
(2) Summarizing, the following conclusions are
reached: (1) Mean monthly cryptocurrency returns are
more or less random with low correlations, (2) there is no
clear link to equity markets, and (3) (large) cryptocur-
rencies appear to be dependent at least to some extent
on the macroeconomic factors (GDP growth), Market,
TERM, and DEF.
INVESTMENT STYLE OUTCOMES
Since cryptocurrencies show no links to traditional
asset classes, we now aim to uncover possible strategies/
factors that can be used in a cryptocurrency-specific
asset pricing model. The literature on investment styles
has shown that some strategies or characteristics appear
to be successful in almost every asset class. Asness et al.
(2013) and Asness et al. (2015) are popular examples for
an investment style analysis in a multi-asset framework.
The literature on investment styles in cryptocurrencies,
however, is still rather limited, which is why we aim to
narrow this gap.
Methodology
We try to cover as many investment styles as pos-
sible. Because of limited data, which includes mainly

104   Investments in Cryptocurrencies: H andle with Care! Summer 2019

 Exhibit 9
Macroeconomic Risk Exposures

&RQV *'3
'DWD *URZWK *URZWK 0DUNHW 7(50 '() 5 $GM5
3DQHO
$OO (: ± ±   ± ± ± ±    ±
3DQHO
$OO (: ± ±     ± ±    
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$OO 9: ± ±     ± ± ± ±  
$OO 09 ± ±     ± ± ± ±  
3DQHO
(:HTXLW\UHWXUQV       ± ± ± ±  
(:);UHWXUQV ± ±   ± ±      
3DQHO
$OO (:       ± ±    
$OO 9:     ± ± ± ±    
$OO 09       ± ±    
%7&       ± ±    
/7&       ± ± ± ±  ±
33&            
10&       ± ±    ±
75&       ± ±    

Notes: All(EW), All(VW), and All(MV) correspond to the data sets including all available digital coins as equal-, volume-, or market cap–weighted
portfolios. Consumption growth is the short-term (one-month) growth rate of US non-durable real consumption. GDP growth is the quarterly US GDP
growth rate. Market describes the monthly excess returns of the MSCI world index over the T-bill. The Fama and French (1993) bond factors TERM and
DEF are the spreads between 10-year US government bonds and the T-bill and the default spread between US corporate bonds and US government bonds,
respectively. T-statistics in parentheses are stated to the right of the respective coefficient. (Adj.) R 2 is in %. *** indicates significance at the 1% level,
** indicates significance at the 5% level, and * indicates significance at the 10% level. The time frame of the macroeconomic-regressions in Panel 1 ranges
between April 2014 and October 2017. The period of time investigated for Panels 2, 3, and 4 begins in April 2013 and ends with February 2018.
Intercepts are not reported for reasons of clarity and comprehensibility.

Exhibit 10
Significant Coefficients Complete Universe (2)

&RQV *'3
'DWD 6LJQLILFDQFH *URZWK *URZWK 0DUNHW 7(50 '()
3DQHO
$OO /HYHO     
/HYHO     
/HYHO     
3DQHO
$OO /HYHO     
/HYHO     
/HYHO     

Notes: The values in the exhibit are percentage values describing the number of significant coefficients with respect to the whole investment opportunity set.
Thus, a value of 16.27 can be read as “16.27% of all coefficients of consumption growth in Panel 1 are significant at the 10% level.”

Summer 2019 The Journal of Alternative Investments   105

 Exhibit 11
Styles: Construction Methodology

6W\OHRU3UR[\ ,QLWLDOO\,QWURGXFHGE\ &RQVWUXFWLRQ 'LUHFWLRQRI6RUWV 3DQHOV

5HYHUVDO3UR[LHV
3 ±3LW±
5HYHUVDO 'H%RQGWDQG7KDOHU  U5HYHUVDOL  LW± 'RZQ $OO
3LW±
3 ±3LW±
6KRUW7HUP5HYHUVDO -HJDGHHVKDQG7LWPDQ  U6KRUW5HYHUVDOL   LW± 'RZQ $OO
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3LW±
,OOLTXLGLW\3UR[LHV
U
$PLKXGL    Σ  LG 
' L

$PLKXG $PLKXG  'L G  92/'LYG 8S $OO

9ROXPH 'DWDUHWDO  9ROXPHL OQ 7XUQRYHU%\9DOXHL 'RZQ 3DQHOV 

'HIHQVLYH3UR[LHV
5HDOL]HGYRODWLOLW\IURPW±WRW±
PRQWKO\ RUW±WRW± GDLO\
/RZ9RODWLOLW\ %OLW]DQGYDQ9OLHW   1 'RZQ $OO
σL  Σ U ±U 
1± L  L
0RUG &29 ULW UPW
/RZ%HWD %ODFNHWDO  βL  Σ 'RZQ $OO
W  9$5 UPW
3LW±0RUG±3LW±0RUG
0RPHQWXP -HJDGHHVKDQG7LWPDQ  U020L  8S $OO
3LW±0RUG
6L]H %DQ]  6,=(L OQ 0DUNHW9DOXHL 'RZQ 3DQHOV 

Notes: Direction of sorts indicates whether we sort in ascending (up) or descending (down) order. P05 then goes long the assets at the end of the sorted list
and P01 shorts the assets on top of the sorted list. Panel 1 is the panel including BTER data, Panel 2 describes the coinmarketcap.com data, and Panel 3
includes equity and FX data. P is the price of asset i at time t. D i describes the number of days with available data, r id is the return of asset i on day d. The
daily trading volume in a specific currency is given by VOLD ivd. r i is the return of an asset i, whereas r m is the market return. COV denotes covariance and
VAR denotes variance. N can be read as the number of observations. The * indicates a calculation based on daily data, whereas no * means a calculation
based on monthly data.

high, low, close, volume, and for the coinmarketcap.com
panel, also market value information, we focus on the
styles momentum, defensive, illiquidity, reversal (which
could be regarded as a value proxy), and size. Exhibit 11
summarizes the investment styles, construction details,
and references of the original studies as well as the data
sets for which the described styles are calculated.
Momentum is calculated as the classic Jegadeesh
and Titman (1993) momentum ranging from t-2 to t-12.
For defensive, two different approaches are applied,
low beta and low volatility. Low beta sorts for the betas
against the equally-weighted return of the investigated
data set during the past 12 months (for reasons of com-
parability, the equally-weighted returns in all panels are
calculated since we could not obtain market value data
for Panel 1). Low volatility uses the realized volatility
during the past 12 months as sorting criterion based
on monthly data. The lookback period usually amounts
to 36 (up to 60) months, which would leave us with
only 10 to 24 months for the performance measure-
ment. Reversal commonly looks at the past five year
losers as sorting criterion but because of the limited
data set (in terms of T) we also calculate reversal as the
12 months reversal. Since we originally obtained daily
data, we extend these approaches to calculate short-term
momentum, short-term beta, short-term volatility, and
short-term reversal. Each of the described short-term
strategies looks at the past 30 days for its calculation.
Another investment style based on daily data is illi-
quidity as measured by the Amihud (2002) ratio. For
the coinmarketcap.com panel, we also simply sort for the
turnover (by value) information, which is given com-
pletely in USD. For the same panel, we are as well able
to construct size as the log of the market value, which

106   Investments in Cryptocurrencies: H andle with Care! Summer 2019

 is again given fully in the same currency. We winsorize
the characteristics to control for outliers by setting the
first and the 99th percentile in every single month to
missing values, calculated over all included assets.
All styles are then sorted into quintiles in month
T. We measure the performance of all quintiles in
month T + 1 based on an equally-weighted portfolio.
Here, we also winsorize the return data to con-
trol for additional outliers by setting the top and the
Downloaded from https://jai.pm-research.com at CAIA on December 22, 2019 Copyright 2019 Pageant Media Ltd.
bottom percentile to missing values every month.
For descriptive purposes we report the outcomes of
the same analysis without any outlier adjustment in
Appendix C (online). We also run a third analysis
in which we exclude the top and bottom percentile
returns for every month in the cross-section and also
in the return series of the individual cryptocurrencies.
The market-neutral portfolio is obtained by going long
P05 and shorting P01 (i.e., P05-P01) as described in
Exhibit 11. We do not consider transaction costs.11 All
styles are rearranged monthly.
Investment Style Results
From the previous sections it already emerges
that cryptocurrencies behave differently when com-
pared with the two traditional asset classes equities and
FX. Asness et al. (2013) show that the investment styles
momentum and value work in multiple asset classes.
Hubrich (2017) and Rohrbach et al. (2017) report sim-
ilar findings using relatively small cryptocurrency data
sets. We further contribute to this stream of the lit-
erature by illustrating the performance of (short-term)
reversal, illiquidity as measured by Amihud (2002) and
simple volume data, defensive (as measured by [short-
term] low volatility and [short-term] low beta), as well
as (short-term) momentum and size. The styles are cal-
culated only for panels with the respective necessary and
available data. Here, we exclude Panel 4 since it contains
only five assets, which is too few for meaningful port-
folio sorts. The choice of the styles is based mainly on
the available data and not meant to be comprehensive.
Exhibit 12 reports the results of the five invest-
ment styles applied on cryptocurrency data. Short-term
reversal appears to be more successful than its one-year
11
Transaction costs on cryptocurrency exchanges normally
range between 0.05% and 0.25% per trade, depending on the traded
volume.
Summer 2019
counterpart. It also achieves significant positive returns
in all but one of the cases in Panel 2. Illiquidity proxied
by the Amihud ratio results in mostly negative outcomes
in Panel 1 and in Panel 2. For Panel 2 we use turnover by
value as a second sorting criterion for illiquidity, which
achieves clearly better results. The difference between
the two proxies, however, leaves the use of the Amihud
measure in cryptocurrencies in doubt. Coinmarketcap
.com provides market values for each cryptocurrency,
which we regard as a proxy for size. Here, we go long
small market values and short high values. This yields
positive but not significant monthly hedge portfolio
returns. Longer-term defensive proxies such as 12M low
volatility or low beta do not yield clear and sufficient
results. The same applies to the short-term defensive
variants. Momentum also seems not to exist in both
panels. Instead, a short-term reversal effect appears to
exist.
The key takeaway from this analysis might be
the positive mean returns for (especially short-term)
reversal, turnover, and to some extent size in Panel 2.
The tested time periods, however, are too short to draw
general conclusions. Academic research usually investi-
gates several decades of financial data compared with
the short cryptocurrency panels. These styles would also
need to be tested in other data sets. Because of limited
data (in terms of length) we are also forced to deviate
from the traditional investment style construction meth-
odology as described in the literature. Defensive, for
instance, commonly applies a look-back period of 36
to 60 months. Long-term reversal usually looks at the
past 60 months. Therefore, it is still too early to arrive
at unequivocal findings; the availability of longer data
must be awaited.
CRYPTOCURRENCY-SPECIFIC FACTORS
Since the equity and macroeconomic asset pricing
models do not yield sufficient findings, we apply a third,
alternative pricing model. This model is inspired by the
classic Fama and French (1993) three-factor model and
incorporates the factors found above, namely, short-term
reversal, illiquidity (as measured by turnover), and size,
into a cryptocurrency-specific asset pricing model. Thus,
we construct the four factors, crypto market (CMKT),
crypto size (CSMB), crypto illiquidity (CILQ), and
crypto short-term reversal (CSTR), based on all avail-
able digital coins included in Panel 2. Panel 2 comprises
The Journal of Alternative Investments   107
 Downloaded from https://jai.pm-research.com at CAIA on December 22, 2019 Copyright 2019 Pageant Media Ltd.

Exhibit 12
Investment Style Results

Reversal Illiquidity Defensive Momentum Size

Data 12M 30d Amihud Turnover 12M Vol 30d Vol 12M Beta 30d Beta t –2Mt –12M t –1dt –30d log(MV)
Panel 1
All Mean (%) –0.6859 1.9251 –1.0303 – –6.2909 7.4431 –7.9321 –3.8200 –1.0618 –1.9251 –
t-stat (–0.1193) (0.4334) (–0.4043) – (–0.6852) (1.5391) (–0.7076) (–0.6709) (–0.2108) (–0.4334) –
SD 31.6484 28.4576 37.3853 – 51.2413 30.9400 66.4090 36.9036 27.7261 28.4576 –
+ Mean (%) 4.4849 –3.5039 –6.0888 – –8.0645 –12.1836 –10.0966 –4.7677 –5.2582 3.5039 –
t-stat (0.6846) (–0.6866) (–0.5622) – (–0.5106) (–1.6842) (–0.8219) (–0.6561) (–0.7177) (0.6866) –
SD 35.8844 32.6846 50.1691 – 81.3563 46.2699 72.7422 47.1031 40.2276 32.6846 –
– Mean (%) 1.5532 3.8302 2.9926 – –6.9947 10.1470 –12.8173 –0.5858 1.7861 –3.8302 –
t-stat (0.2209) (0.7972) (1.1373) – (–0.6849) (1.9161)* (–0.9947) (–0.1011) (0.2537) (–0.7972) –
SD 38.7101 30.7699 36.7695 – 46.5148 33.8555 57.6843 37.5795 38.7524 30.7699 –
Crypto Quote Mean (%) 9.6589 1.7884 2.8147 – –8.0623 6.0718 –8.5178 –3.9440 –6.9795 –1.7884 –
t-stat (0.9568) (0.4199) (0.1641) – (–0.9431) (1.1142) (–0.5943) (–0.7838) (–0.9287) (–0.4199) –
SD 55.3193 27.2843 46.1123 – 54.1074 34.8876 84.9412 32.6122 41.1935 27.2843 –

108   Investments in Cryptocurrencies: H andle with Care!

Fiat Quote Mean (%) –0.7438 6.1634 –8.6690 – 5.2103 7.7165 –1.5372 7.2016 1.8277 –6.1634 –
t-stat (–0.1571) (1.1156) (–0.7433) – (0.5524) (0.9505) (–0.9418) (0.8311) (0.2899) (–1.1156) –
SD 0.8759 35.3696 52.4749 – 52.6837 49.4466 52.7486 53.4299 34.6966 35.3696 –
Panel 2
All Mean (%) 1.8137 6.7902 –11.7967 12.5888 1.3014 –3.3278 0.0737 –4.2188 –0.7894 –6.7902 6.0530
t-stat (0.6090) (2.0740)** (–3.7840)*** (5.1069)*** (0.3714) (–0.8507) (0.0078) (–1.1727) (–0.2705) (–2.0740)** (1.3338)
SD 20.2309 26.5388 21.3031 16.7364 24.0674 29.5371 67.5879 27.1575 19.8404 26.5388 33.5733
+ Mean (%) 7.0539 9.2178 –4.0747 9.9489 –4.6097 –8.3428 –4.1639 –4.3973 –4.3152 –9.2178 9.8011
t-stat (2.2034)** (3.2532)*** (–1.1954) (3.3252)** (–1.0615) (–1.8264)* (–0.4292) (–1.0467) (–1.7079)* (–3.2532)*** (1.9621)*
SD 21.2678 23.1134 23.8429 20.8225 29.7616 34.4622 69.3575 26.8024 16.7505 23.1134 36.9898
– Mean (%) 2.3541 6.8599 –15.9318 19.8734 24.9774 14.0691 9.5432 1.3867 –9.7115 –6.8599 4.3366
t-stat (0.4301) (0.4627) (–3.2119)*** (5.6967)*** (4.2011)*** (2.2712)** (0.8915) (–0.2021) (–1.8541)* (–0.4627) (3.2639)***
SD 43.3512 33.0345 34.1463 23.4294 39.2307 41.3599 74.9984 30.5422 36.3960 33.0345 26.0849
Panel 3
Equities Mean (%) –0.3620 –0.0081 –0.0570 0.1112 0.9650 0.6574 0.3506 0.2409 0.3827 0.0081 0.3701
t-stat (–0.7458) (–0.0270) (–0.2483) (0.5541) (1.6709) (1.4837) (0.4130) (0.4607) (0.7801) (0.0270) (1.8721)**
SD 3.3311 2.2976 1.5928 1.5525 3.9859 3.3732 6.1269 4.0168 3.3665 2.2976 1.5181
FX Mean (%) 0.1616 0.1698 –1.0661 – 0.6531 0.6248 0.2532 0.8014 0.0974 –0.1698 –
t-stat (0.3432) (0.5631) (–2.2884)** – (1.4264) (1.7947)* (0.7219) (2.5456)** (0.2166) (–0.5631) –
SD 3.2347 2.2974 3.1984 – 3.1652 2.6498 2.5309 2.3938 3.0897 2.2974 –

Notes: The first row of each data set contains the mean monthly hedge portfolio returns for each investment style. In parentheses below we report the t-statistics of the mean monthly hedge
portfolio returns tested against the null hypothesis of a mean equal to 0. Below the t-stat we report the standard deviation (SD) for the respective investment style. 12M can be read as 12
months, and 30d as 30 days. Short-term styles (30d) and Amihud are calculated on daily data; all other styles on monthly data. *** indicates significance at the 1% level, ** indicates

Summer 2019
significance at the 5% level, and * indicates significance at the 10% level.
 Exhibit 13
Cryptocurrency-Specific Factors

'DWD $OSKD &0.7 &60% &,/4 &675 5 $GM5

3DQHO
$OO (: ± ±   ± ±      
3DQHO
$OO (: ± ±   ± ±      
$OO 9:     ± ±   ± ±  
Downloaded from https://jai.pm-research.com at CAIA on December 22, 2019 Copyright 2019 Pageant Media Ltd.

3DQHO
(:(TXLW\5HWXUQV     ± ±   ± ±  
(:);5HWXUQV   ± ±   ± ±    
3DQHO
$OO (: ± ±   ± ±   ± ±  
$OO 9: ± ±   ± ± ± ± ± ±  
$OO 0:     ± ± ± ± ± ±  
%7&       ± ±    
/7& ± ±   ± ±   ± ±  
33& ± ±   ± ±      
10& ± ±   ± ±      
75& ± ±   ± ±   ± ±  

Notes: All(EW) and All(VW) correspond to the data sets including all available digital coins as equal- and volume-weighted portfolios. We do not
include All(MW) in Panel 2 since this index is equivalent to the independent variable CMKT. CMKT, CSMB, CILQ, and CSTR are the newly
constructed factors inspired by the classic Fama–French three-factor model. T-statistics in parentheses are stated to the right of the respective coefficient.
(Adj.) R 2 is in %. *** indicates significance at the 1% level, ** indicates significance at the 5% level, and * indicates significance at the 10% level.
The time frame of the regressions in Panel 1 ranges between April 2014 and October 2017. The period of time investigated for Panels 2, 3,
and 4 begins in April 2013 and ends with February 2018.

all currently traded cryptocurrencies and should there-
fore serve as an appropriate universe to construct the
different factors. CMKT in this context is a market-cap
weighted index and CSMB is a factor constructed by
going long the tercile of virtual coins with the smallest
market capitalizations and short the tercile with the big-
gest market capitalizations. CILQ is a factor constructed
by going long the tercile of digital coins with the lowest
turnover and short the tercile with the highest turnover.
Short-term reversal goes long the tercile with the loser
cryptocurrencies from the last month and shorts the
winners of the last month. Value (HML) from the classic
Fama and French (1993) three-factor model at this point
cannot be calculated easily because of a lack of funda-
mental (e.g., book-to-market) data. Thus, there are two
alternatives in the academic literature: (1) Use long-term
reversal as a value proxy, which is not possible because of
a too-short data history and (2) adopt an approach stem-
ming from commodity markets. Commodities as well
exhibit no real fundamental data and are comparable
with cryptocurrencies in terms of intrinsic value (both
of them lack intrinsic value and prices are determined
by supply and demand only). Here, Szymanowska et al.
(2014) construct a commodity HML factor by taking
long positions in commodities with the highest spot pre-
mium/basis and short positions in commodities with the
lowest spot premium/basis. Since there are no futures for
cryptocurrencies yet (except for BTC), the basis of vir-
tual coins is unknown. In commodity markets, the basis
is the difference between the price of a nearby future
and the spot price. The nearby future tends to converge
to the spot price and equals the spot price at maturity.
One possibility could be to take the difference between
the log of the prices in montht and montht-1 to arrive at
the spot premium plus the basis. That, however, breaks
down to short-term reversal again. Thus, an alternative
cryptocurrency model can be written more formally as:
rit = α i + βiCMKTt + siCSMBt + hiCILQt
+ viCSTRt + εit (3)
This model does a much better job than the two
previous models. As can be seen in Exhibit 13, the R 2

Summer 2019 The Journal of Alternative Investments   109

 Exhibit 14
Significant Coefficients Complete Universe and FM Coefficients (3)

'DWD 6LJQLILFDQFH $OSKD &0.7 &60% &,/4 &675

3DQHO
$OO /HYHO     
/HYHO     
/HYHO     
3DQHO
Downloaded from https://jai.pm-research.com at CAIA on December 22, 2019 Copyright 2019 Pageant Media Ltd.

$OO /HYHO     

/HYHO     
/HYHO     
)05HJUHVVLRQV
3DQHO )0&RHIILFLHQW ±   ± ±
WVWDW ±   ± ±
3DQHO )0&RHIILFLHQW ± ± ± ± 
WVWDW ± ± ± ± 

Notes: The values in the exhibit are percentage values describing the number of significant coefficients with respect to the whole investment opportunity set.
Thus, a value of 7.94 can be read as “7.94% of all coefficients of alpha in Panel 1 are significant at the 10% level.” We also report the Fama–MacBeth
coefficients for the factors CMKT, CSMB, CILQ, and CSTR for Panels 1 and 2, respectively (t-stat is reported below the coefficient in parentheses).
Here, we run a rolling multivariate FM regression to see if the factors are sufficiently priced. The cross-sectional regression is calculated as r it+1 = λi0 + λ1
d1it + ... + λkdkit + eit with r it+1 being the return of the underlying cryptocurrencies i in t + 1, dkit being the betas with regard to the specific factor and the error
σ
term e. The t-statistics is calculated as: t λk = N σλλkk with λ as the mean of the lambdas and the standard error of the mean lambdas Nλk . N is the
number of observations.

values increase dramatically. Also, CMKT is highly
significant in Panels 1, 2, and 4. The coefficients of
CSMB and CILQ are less often significant and, if at all,
only at the 5% or 10% level. CSTR shows no significant
coefficient at all. Applying cryptocurrency-specific fac-
tors on Panel 3 yields no surprising findings, with only
one of the independent variables being significant and
with still relatively low R 2 values. Thus, the results found
in the other panels need to be put into context. Since
BTC dominates a market cap–weighted index con-
structed from Panel 2 (which is equivalent to CMKT)
during a long period of time, the regression results for
volume- and market cap–weighted indexes on the left
side of the regression are somehow explained by them-
selves. Only the results for equally-weighted indexes are
promising because of a tremendously lower inf luence
of BTC in those cases. The same applies to the single
virtual coins (excluding BTC) in Panel 4.
This finding is also supported by Exhibit 14, which
shows significant coefficients of CMKT in 8% and
46% of the cryptocurrencies in Panels 1 and 2, respec-
tively. To investigate if the four factors CMKT, CSMB,
CILQ, and CSTR are sufficiently priced in these two
panels, we additionally estimate rolling, cross-sectional
FM regressions (see Fama and MacBeth 1973). Here,
we calculate the rolling 250-day (one-year) betas with
regard to the respective factor that is used as the explan-
atory variable in the regression model. The data his-
tory for monthly data, however, is too short (T = 59
months) for a meaningful analysis. The results reported
in Exhibit 14, thus, do not yield significant results. The
FM coefficients are either priced in the wrong direction
or exhibit only small t-values.
CONCLUSION
Our work explores several issues. We report
descriptive statistics for the complete available cryptocur-
rency landscape in February 2018; test cryptocurrency
returns against a standard asset pricing model, macro-
economic variables, and cryptocurrency-specific factors;
and further explore several investment styles. It becomes
apparent that cryptocurrency markets are not as mature
as other asset classes and, thus, show only slight to no
connections to traditional markets such as US equities or
FX. Therefore, cryptocurrencies should be treated with
care since it seems that traditional capital market models
cannot yet be applied to this young asset class.

110   Investments in Cryptocurrencies: H andle with Care! Summer 2019

 There is also a deep discussion about whether
cryptocurrencies are a bubble or not. Technically
speaking, a f inancial bubble is often def ined as a
performance of more than 1,000% within 10 years.
Many cryptocurrencies achieve(d) such a performance
much faster. A cryptocurrency also cannot be valued
sufficiently, which might drive the attraction for it.
However, the size of the crypto market is still very
small compared with other asset classes and not even
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1% of the worldwide population holds cryptocurren-
cies. So, the cryptocurrency market should mature and
become less volatile with increasing size. All in all we
do not aim to make forecasts but stick to our main
finding that investments in cryptocurrencies should
be treated with care.
Since current research on cryptocurrencies is rather
limited, all fields of traditional financial markets research
could be considered for this asset class. However, data
availability is still short and data quality issues need to
be discussed. It also remains to be seen how cryptocur-
rencies develop further. A more mature market might
make it easier to apply traditional research methods. If
cryptocurrencies do not become adopted by mainstream
institutions and users, further research might be unnec-
essary. So far however, cryptocurrencies are an exciting
new asset class worthy of being examined.
ACKNOWLEDGMENT
The author thanks Thorsten Poddig and Ulrich Ham-
merich for valuable comments and helpful discussions.
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