Revisiting the determinants of cryptocurrency excess return: Does scarcity matter?

Cryptocurrencies have emerged as a new financial asset class, and the literature in this area is increasing rapidly. This study examines the determinants and proposes a new approach to capture the scarcity effect of proof-of-work cryptocurrency return. We find that the scarcity effect is one of the major determinants of excess return. Besides the scarcity effect, our results indicate that market risk premium, momentum effect, size effect, investor attention, and mining costs effect are significant determinants of proof-of-work cryptocurrency excess return. In addition, we compare the effectiveness of three mimicking portfolios: size effect, momentum effect, and scarcity effect to their background factors. The findings show that compared to their background factors, size effect and scarcity effect mimicking portfolios have better-explaining power.