The financialization of cryptocurrencies

• Main Authors: HUANG, Lei, LIN, Tse-Chun, LU, Fangzhou, SUN, Jian
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2023
• Subjects: Cryptocurrency; Bitcoin ETFs; Coinbase; GBTC; Sentiment; Finance; Finance and Financial Management
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/7447; https://ink.library.smu.edu.sg/context/lkcsb_research/article/8446/viewcontent/SSRN_id3948407.pdf
• Institution: Singapore Management University

We show that change in Grayscale Bitcoin Trust premium is the single most significant predictor of Bitcoin daily return. This sentiment measure is similar to the closed-end fund discount measure as in Baker and Wurgler (2006), but more likely to reflect the excess demand from traditional investors than from blockchain specialists. Although there is a substantial variation in Bitcoin price quotes worldwide, this Grayscale premium and discount predict Bitcoin daily return for the most liquid Bitcoin exchanges. Using K-means clustering and LDA analysis, we find that this predictability is especially significant when there is a large variation in bullish and bearish market sentiment, innovation regarding CBDC, regulations on crypto exchanges, but not when there is innovation regarding blockchain technology or bitcoin mining. A simple long and short strategy based on this signal generates a daily alpha of 40 bps. These findings suggest that Bitcoin prices react with a delay to the information contained in the sentiment of traditional investors and investors who are constrained from directly holding Bitcoin.