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The Problem with Fidelity’s Crypto Trading Platform

October 16, 2018

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Yale Economist Cryptocurrency Analysis Paper

August 9, 2018


Yale economist Aleh Tsyvinski and Yukun Liu, a Ph.D. candidate in the Department of Economics developed “the first-ever comprehensive economic analysis of cryptocurrency and the blockchain technology.” The central finding of their research is that the risk-return tradeoff of cryptocurrencies is distinct from those of stocks, fiat currencies, and precious metals.


Other common factors that affect traditional investments seem not to play a role in the price of cryptocurrencies as well. The researchers found that cryptocurrencies:

  • have no exposure to most common stock market and macroeconomic factors.

  • have no exposure to the returns of currencies and commodities.

  • returns can only be predicted by factors which are specific to cryptocurrency markets.

  • are impacted by a strong time-series momentum effect

  • community engagement for investor attention strongly forecast cryptocurrency returns.


They followed by assessing the potential of Bitcoin, Ethereum and Ripple to benefit or disrupt various industries. They created an index of exposures to cryptocurrencies of 354 industries in the US and 137 industries in China as well. An interview with professor Aleh Tsyvinski provides some of the details to the full research. The pair focused on Bitcoin, Ethereum and Ripple. They used traditional finance tools to get a handle on the market behaviour of the coins, or discovered why those traditional methods weren’t working.


Sharpe Ratio


Does a given return compensate the corresponding volatility? In the case of cryptocurrencies, they are high return and high volatility. The Sharpe ratio measures the performance of an asset by adjusting for risk. Using this traditional method, the research found that the return is higher than the risk implied by its volatility, and is even slightly higher than stocks and bonds. So, in these terms, cryptocurrencies are actually normal.


Momentum Effect


Professor Tsyvinksi describes this most simply as the process when, “an asset increases in value, it will tend to rise even higher.” That feature is not unique to cryptocurrencies, but the strength it effects this new asset class is uncommon. A basic strategy formulated form their data to take advantage of momentum effect is that an investor should buy Bitcoin if its value increases more than 20% in the previous week. This strategy shows outstanding returns historically, with a very high Sharpe ratio.


Investor Attention


Google searches, Twitter mentions and news strongly influencing cryptocurrency. The effect is proportional in positive and negative investor attention.



By: BGN Editorial Staff



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