Cryptocurrencies, Mainstream Asset Classes and Risk Factors: A Study of Connectedness

• Date: 01 December 2018
• Author: George Milunovich
• Published date: 01 December 2018
• DOI: http://doi.org/10.1111/1467-8462.12303

Policy Forum: Cryptocurrencies

Cryptocurrencies, Mainstream Asset Classes and Risk Factors:

A Study of Connectedness

George Milunovich*

Abstract

We investigate connectedness within and

across two major groups or assets: i) f‌ive

popular cryptocurrencies and ii) six major

asset classes plus two commonly employed risk

factors. Granger causality tests uncover six

direct channels of causality from the elements

of the mainstream assets/risk factors group to

digital assets. There are also two statistically

signif‌icant causal links going in the other

direction. In order to provide some perspective

on the magnitude of these linkages we estimate

networks from forecast error variance decom-

positions. The estimated connectedness within

the groups is relatively large, whereas the

linkages across the two groups are small in

comparison.

Virtual currencies, perhaps mos t notably Bitcoin, have

capturedthe imagination of some, struck fear amongothers,

and confused the heck out of therest of us.

[Thomas Carper, US Senator]

1. Introduction

Cryptocurrencies are digital assets intended to

serve as alternative means of payment. They

are created and managed via decentralised

open source code, rather than an authority

such as a central bank. Bitcoin, one of the

most popular cryptocurrencies, was intro-

duced in a white paper written by Nakamoto

(2008). The white paper states that Bitcoin is

a‘peer-to-peer version of electronic cash

[which] would allow online payments to

be sent directly from one party to another

without going through a f‌inancial institution’.

While the true identity of Nakamoto remains

unknown it appears that Bitcoin was, at least

in part, inspired by the 2008 f‌inancial crisis.

This can be inferred from the text embedded

in the f‌irst block of Bitcoins which reads: ‘The

Times | 1/03/2009 | Chancellor on Brink of

Second Bailout for Banks’. While conceived

in 2008, the Bitcoin network was developed in

2009 and in 2010 several initial transactions

were recorded.

More recently the growth in the number of

Bitcoin transactions and its market cap

has been unprecedented. In response to the

success of Bitcoin new cryptocurrencies

started entering the market in early 2010.

Presently there are more than 130 cryptocur-

rencies that have market capitalisation in

* Macquarie University, NSW 2109 Australia; email:

<george.milunovich@mq.edu.au>.

The Australian Economic Review, vol. 51, no. 4, pp. 551–563 DOI: 10.1111/1467-8462.12303

°

C2018 The University of Melbourne, Melbourne Institute: Applied Economic & Social Research,

Faculty of Business and Economics

Published by John Wiley & Sons Australia, Ltd