Are cryptocurrencies a risk-return tradeoff?

We establish that the risk-return tradeoff of cryptocurrencies (Bitcoin, Ripple, and Ethereum) is distinct from those of stocks, currencies, and precious metals. Cryptocurrencies have no exposure to most common stock market and macroeconomic factors. They also have no exposure to the returns of currencies and commodities.

Are cryptocurrency returns compensated by risk factors derived from the stock market?

We test this by studying whether the returns on the cryptocurrency market are compensated by the risk factors derived from the stock market. We show that the CAPM betas are sizable but the alphas remain large and statistically significant. The exposures to other common risk factors in the stock market are very small.

Which cryptocurrencies are exposed to currency returns?

Table 8 shows currency exposures of Bitcoin, Ripple, and Ethereum returns. For currency returns, we consider five major currencies: Australian Dollar, Canadian Dollar, Euro, Singaporean Dollar, and UK Pound. The exposures of all other cryptocurrencies to these commodities are not statistically significant and the alpha estimates barely change.

Do cryptocurrencies have a tail-risk?

There is also a growing literature on the empirical regularities of cryptocurrencies. Borri (2019) shows that individual cryptocurrencies are exposed to cryptomarket tail-risks. Makarov and Schoar (2020) find that cryptocurrency markets exhibit periods of potential arbitrage opportunites across exchanges.