Risk factors in cryptocurrency pricing

Abstract

This paper investigates the cross-sectional return predictability in the cryptocurrency market by systematically constructing and analyzing a comprehensive set of risk factors. Building on traditional asset pricing literature and the unique tokenomic characteristics of digital assets, we examine eleven key factors, including market, size, momentum, supply dynamics, network activity, computing power, technological attributes, governance decentralization, liquidity, volatility, and behavioral attention. Using quintile portfolio sorting, Fama-MacBeth regressions, and principal component analysis, we evaluate the pricing power and significance of each factor in explaining cryptocurrency returns. Our findings show that several token-specific factors are significantly priced in the cross section, indicating that crypto-assets reflect systematic risks and behavioral influences despite their decentralized nature.