Factors of Ethereum Profitability as a Platform for Creating Decentrilized Applications

Abstract

By now, cryptocurrencies have almost become a part of the modern financial asset space, but the cryptocurrency market itself is not homogeneous, and individual cryptocurrencies can differ significantly in their properties and functions. For example, the cryptocurrency Ether is second in capitalization after Bitcoin, but the Ethereum and Bitcoin blockchains differ significantly in their properties and functions. In particular, Ethereum is the most popular digital platform for creating decentralized applications (dApps). The purpose of this work is to try to answer the question "Does the market take into account the features of the Ethereum blockchain in the price dynamics of the Ether cryptocurrency?" This question is also directly related to the search for potential fundamental factors that can explain the price dynamics of Ether. The main econometric method used in the study is generalized autoregressive conditional heteroskedasticity (GARCH) models. Having evaluated about 15 thousand different specifications of GARCH models, where various Ethereum blockchain usage metrics were used as explanatory variables, we obtained the results that Ethereum network usage metrics do not significantly correlate with Ether cryptocurrency returns. Moreover, these metrics are also unable to explain the relative strengthening/weakening of Ether relative to Bitcoin. Thus, we conclude that despite the presence of a number of special functional properties of the Ethereum blockchain, the price dynamics of the Ether cryptocurrency does not reflect them.