Investigating Cryptocurrency Behavior in the Open Market and Its Relationship with Other Asset Classes

Abstract

Since 2015, there has been an explosion in the popularity and asset values of cryptocurrencies, a new medium of exchange that allows for complete security and anonymity of transactions. The two most prominent cryptocurrencies today are Bitcoin and Ethereum. As trading volumes continue to rise and cryptocurrencies evolve and become more mainstream, the ability to value it accurately becomes increasingly important. The best approach to start this analysis is to compare this new asset class to traditional asset classes that we have seen before to see if similarities exist between them. The goal of this study is to perform an empirical analysis of the cryptocurrency asset class by comparing the returns of two of the most popular cryptocurrencies, Bitcoin and Ethereum, with the returns of various other traditional asset classes in an attempt to find underlying relationships among the asset classes. We find that a strong relationship exists between cryptocurrency returns and stock market returns as well as the existence of a momentum effect for both cryptocurrencies. However, we fail to find any sort of association between cryptocurrency and both precious metals and traditional currencies.