Researchers from the Illinois Institute of Technology have conducted a study that uncovers the key predictors of bitcoin returns, offering valuable insights for investors, economists, and academics.
The study challenges conventional wisdom and sheds light on the role of blockchain technology, investor sentiment, and economic stress levels in predicting the behavior of the popular cryptocurrency.
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Predictors of Bitcoin Returns
Led by Sang Baum "Solomon" Kang, an associate professor of finance at Illinois Tech's Stuart School of Business, the study provides empirical evidence that challenges the notion of Bitcoin's correlation with economic fundamentals.
Kang collaborated with his former doctoral students, Yao Xie and Jialin Zhao, in analyzing a vast amount of data spanning from January 2011 to January 2020, encompassing 25 information variables across various categories.
The study highlights the significance of blockchain technology, investor sentiment, and economic stress levels as reliable predictors of bitcoin returns.
Kang explains, "We find that blockchain technology, investor sentiment, and stress levels have predictive power for bitcoin returns."
The researchers challenge the traditional belief that conventional asset returns can effectively forecast bitcoin returns. Instead, they identify longer return horizons as being more indicative of Bitcoin's return predictability, supporting the idea that Bitcoin functions both as a technical artifact and a speculative asset.
Key Findings
The study's findings offer intriguing insights into the predictors of Bitcoin returns. One key finding suggests that mining Bitcoin has become more challenging. It positively predicts returns. As blockchain technology requirements increase, the supply of Bitcoin diminishes, resulting in higher returns.
Moreover, investor sentiment emerges as a significant driver of bitcoin returns, highlighting the speculative nature of the cryptocurrency. Conversely, higher stress levels and economic turmoil correlate with decreased future bitcoin returns, highlighting the risks associated with owning bitcoin as an asset.
The study disrupts the conventional categorization of Bitcoin, uncovering its intricate and versatile nature. Bitcoin has assumed diverse economic roles throughout its existence, functioning as a medium of exchange, a speculative investment, and a sought-after safe-haven asset due to its limited supply and the expenses associated with mining.
Kang emphasizes the significance of these findings, stating, "An underlying principle is that variables predicting the future movement of an asset price may be important in the economic system.
"So understanding what those variables are is important not only to traders who want to take a position in bitcoin, but also to economists who want to understand the nature of bitcoin."
This study conducted by researchers at the Illinois Institute of Technology adds to the growing body of knowledge surrounding Bitcoin. The study equips investors, economists, and academics with valuable tools to navigate the complex cryptocurrency market by uncovering the predictors of bitcoin returns.
The study's findings were published in The Journal of Alternative Investments.
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