What drives the price development of cryptocurrencies? An empirical study of the cryptocurrency market.

Abstract: The novelty, the rapid growth rate and the high volatility of cryptocurrencies have led to great uncertainty without any consensus on whether cryptocurrency is a medium of exchange or a speculative investment. This uncertainty raises the question of what actually drives the price development of cryptocurrencies. Furthermore, the great volatility questions if the risk-adjusted return of cryptocurrencies have been higher than the market return. In this paper, the first question is answered by analysing three categories of variables: macro-financials, supply-demand and attention, and their effects on the cryptocurrency market. The findings imply that size of the cryptocurrency market, trading volume, news articles and views on Wikipedia all have significant effects on the price development, while macro-economic factors do not. The second question is analysed through the M^2-measure, suggesting that investors have been well-compensated for the risk when investing in cryptocurrencies.