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Cryptocurrencies: high volatility and returns

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It has been an extremely volatile year for Bitcoin prices. About a year ago, Bitcoin was trading in a range of $ 4000 to $ 5000. After reaching a maximum of just over $ 20,000 in December 2017, now it seems to be back where it was a year ago, with several highs and lows along the street.

Volatility has been standard in the cryptocurrency market since its inception. University of Michigan finance professor Uday Rajan has analyzed some initial offers of coins and yields on the secondary market of 222 large cryptocurrencies in the period 2013-2017, and found a high degree of volatility and some other.

"During our sample period, the average daily cryptocurrency yield was high compared to other asset classes, with prices moving by several percent a day," Rajan said. "The average daily return for the 222 cryptocurrency sample was a substantial 2.53%."

Although there are well over 1,000 cryptocurrencies, many of them are small in terms of total market capitalization. On large altcoins (non bitcoin cryptocurrencies), yield has shown a strong correlation with Bitcoin's performance. Therefore, an efficient portfolio of cryptocurrencies has been heavily weighted towards Bitcoin.

Cryptocurrencies or tokens are digital assets that are issued in exchange for other cryptocurrencies or legal money such as dollars. Cryptocurrencies, including the Bitcoin market leader, as well as the Ethereum, Ripple, Dash, Litecoin and Monero currencies totaled over $ 300 billion in November 2017.

Rajan and co-authors Albert Hu and Christine Parlor of the University of California, Berkeley, focused on the asset pricing properties of this new class of unregulated instruments.

"Cryptocurrencies provide an interesting benchmark because they are actually unregulated," said Rajan. "Before the SEC crowdfunding rules, there were no restrictions on who could introduce a cryptocurrency in the United States."

Even trading is not regulated, so prices must reflect the uncertainty associated with the profitability of an exchange. It also means that altcoin exchanges are at risk of malfunctions.

The study also assessed the performance of 64 initial offers of coins issued from 2013 to 2017 and compared them with the initial public offers used in the stock market.

The contrast with stock trading in the United States is surprising, said Rajan. Trading in the secondary market of public equities is highly regulated, with the SEC, other regulators and exchanges themselves imposing restrictions on both companies and investors.

The ICO average in the sample raised about $ 6.4 million, compared to $ 94.5 million collected in the average IPO in the US in 2016. On the first day of trading in the secondary market, the currency more than doubled in value, with an increase of 115%. The purchase in the secondary market is, however, a losing proposition, with yields of -10 percent for the first week and -16 percent for the first month, Rajan said.

The amounts collected, yields and listing requirements for trades on which stocks are traded mean that the analogy between ICO and IPO is "literally semantic," Rajan said. "The most relevant comparison group is probably venture capital".

"The last year has seen many changes in the cryptocurrency market," he said. "Since the introduction of Bitcoin futures traded on the stock exchange last December, investors have taken short positions in Bitcoin more easily, while bitcoin volatility has reached a different scale in the last 12 months.

"Nonetheless, some lessons from our study have repercussions on this topic: alt coins remain strongly related to Bitcoin, which is still the dominant factor in the cryptocurrency market".

Explore further:
Bitcoin drops below $ 5,000 for the first time since October 2017

More information:
Cryptocurrencies: stylized facts about a new tool Investible webuser.bus.umich.edu/urajan/research/crypto.pdf

Supplied by:
University of Michigan

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