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The Fundamentals Driving Crypto Trading? There Aren't Any

A new study from the Warwick Business School finds that investors are trading cryptocurrencies based on nothing more than emotion.

  • By Julie Segal

It's not a surprise that investors' decisions about the markets are driven by a mix of fundamental research and emotion. But a new study examining more than a year's worth of weekly trading patterns finds that investors' buying and selling of cryptocurrencies is solely driven by sentiment and mood. 

There are no fundamental economic factors underpinning cryptocurrency prices, including Bitcoin, according to the study, "Cryptocurrencies as an Asset Class: An Empirical Assessment," published by the Warwick Business School. The findings come as institutional investors are showing increased interest in cryptocurrencies as well as other nascent asset classes with little history. 

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Evaluating data from April 2016 to September 2017, Warwick found that the weekly trading patterns also did not correlate with commodities, which are closely tied to traditional currency trading.

Daniele Bianchi, the study's author, said the trading is influenced by both past returns and investor sentiment as prices climb and decline. 

"These are not like normal currencies where a country's economy will influence the price," said Bianchi in a statement accompanying the research. "Instead they share similarities to investing in an equity from a high-tech firm. As a matter of fact, most of these cryptocurrencies come to existence through unregulated crowd sales similar to IPOs, the so-called Initial Coin Offering." 

Bitcoin made up more than 80 percent of trading volume before early 2017. It then dropped to about 40 percent in September, according to the study.

Anticipating institutional investors' entry into the market, both the Chicago Mercantile Exchange and the Chicago Board Options Exchange launched futures contracts on Bitcoin late last year. Nasdaq also plans to offer Bitcoin futures, in part to give comfort to institutional investors wanting traditional market infrastructure in place for crypto. 

Earlier this month, TABB Group released findings saying it expects institutional investors to enter the crypto market this year. But the research firm also said these investors are still being held back by a lack of clear regulations, solid market and other data, and a lack of infrastructure such as exchange involvement. 

TABB also says in its report that a significant amount of money has been raised to invest in crypto by hedge funds, sovereign wealth funds, pensions, and wealthy individuals. 


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