A Factor Risk Analysis of the Cross-Section of Cryptocurrency Returns: A Unique Asset Class

We compare the explainability of cryptocurrency returns from macro and microeconomic risk factors during stressed and normal market environments, in particular, analyzing the effects of the COVID-19 pandemic to cryptocurrency return explainability. We find that risk-premiums are encapsulated within cryptocurrency-specific market factors in both stressed and normal market conditions. Furthermore, cryptocurrency factors, particularly relating to liquidity, momentum, and counterparty risk, showed evidence of providing stronger predictability of cryptocurrency returns during the COVID-19 pandemic compared to pre-pandemic levels. We find that during the stressed market environment, Fama-French 5 factors continue to provide low explainability to cryptocurrency returns.