Dissecting Anomalies in the Returns of Cryptocurrencies

Abstract

This study investigates the return dynamics of cryptocurrencies by utilizing cross- sectional tests, including univariate, conditional, and unconditional bivariate portfolio sorts, as well as time-series tests based on 27 variables that capture size, age, liquidity, prices, volatility, historical returns, and value. Specifically, the study aims to determine whether the return dynamics of cryptocurrencies are similar to those observed in the equities market. This study finds that the cryptocurrency market exhibits similar return dynamics as the equities market. Specifically, the analysis reveals that the cryptocurrency market generates anomalous returns for factors including size, value, historical returns, and volatility, similar to those observed in the equities market. Additionally, the study identifies a positive relationship between liquidity and returns for small, medium and large cryptocurrencies, as opposed to the negative relationship typically observed in the equities market. Contrarily, microcap cryptocurrencies are found to exhibit a negative relationship between liquidity and returns. This study does not find evidence of a relationship between returns and age, a known return driver in the equities market.