The prices of cryptocurrencies are not driven by any economic factors but purely by investors’ mood, according to a study conducted by the Warwick Business School, University of Warwick.
The study, “Cryptocurrencies as an asset class: an empirical assessment,” which looked at the weekly trading patterns of the 14 largest cryptocurrencies, confirmed there was no correlation with any economic indicators that investors based their decisions on or with commodities, and that pricing was entirely influenced by past returns and emotion of investors.
According to the author of the paper, Dr Daniele Bianchi, looking across the 14 biggest cryptocurrencies the high volatility of their price meant that they could hardly be seen as a reliable savings instrument.
“These are not like normal currencies where a country’s economy will influence the price. Instead, they share similarities to investing in an equity from a high-tech firm,” Bianchi said.
“As a result, the market for cryptocurrencies may look similar to the dotcom bubble at the end of the 1990s, and it may be that only a handful of them survive, so for investors it is like choosing who will be today’s Amazon.”
At the same time, Bianchi stressed that although the market for cryptocurrencies was growing, it would remain dominated by a few players.
“Cryptocurrencies have more in common with an equity investment in a company than an investment in a traditional currency. For instance, holding bitcoin can be ultimately seen as an investment in the blockchain technology rather than a simple speculation,” Bianchi said.
“Having said that, portfolio returns are highly volatile, thus negating the chances of using the popular momentum strategy for trading in cryptocurrencies.
“Although there is some predictive power of past performance for future returns, the profitability of a momentum strategy in cryptocurrency markets is significant only in the very short term.”