Blockchain technology, investor sentiment, and economic stress levels are key determinants of bitcoin returns, according to a groundbreaking article by researchers at the Illinois Institute of Technology that provides empirical data to help investors, economists, and academics.

Sang Baum “Solomon” Kang, professor of finance at Illinois Tech’s Stewart School of Business and co-author of the paper, discovered that cryptocurrency is detached from economic fundamentals and therefore cannot effectively serve as a diversifier or safe-haven asset. . Additionally, Kang reported that returns on commodities, securities, and other assets are poor predictors of Bitcoin returns.

“Which Information Variables Predict Bitcoin Returns? Size reduction approach” published Journal of Alternative Investments. Kang co-authored the paper with two former PhD students: Yao Xie (MS Finance ’15, Ph.D. MSC ’21) and Jialin Zhao (Stuart Ph.D. MSC), an assistant quantitative analyst at Morningstar Inc. ’17), St. Adjunct Professor of Quantitative Management at Mary’s University.

Using predictive analytics and scale-down models on data from January 2011 to January 2020, the team analyzed 25 information variables in the categories of macroeconomics, blockchain technology, other assets, stress levels, and investor sentiment.

“We found that blockchain technology, investor sentiment and stress levels have predictive power for bitcoin returns,” Kang says. “Like traditional assets, Bitcoin exhibits higher return predictability with longer return horizons. These findings confirm the dual nature of Bitcoin as a technical artifact and a speculative asset.”

Key findings include:

• Increasing difficulty in Bitcoin mining positively predicts profit. This supports the theory that as the demand for blockchain technology increases, the supply of Bitcoin decreases and therefore its return increases.
• Bitcoin returns are positively tied to investor sentiment, which indicates the speculative nature of the cryptocurrency as an asset.
• Higher levels of stress in the economy or financial turmoil cause Bitcoin’s future returns to decline, highlighting the risks of holding Bitcoin as an asset.

According to the researchers, Bitcoin has long served three distinct economic roles: a form of currency, a speculative security, and a secure commodity due to its scarcity and mining costs.

“There’s a research methodology in academia called ‘return on asset predictability studies,'” Kahn says. “The basic principle is that variables that predict the future movement of an asset’s price can be important in an economic system. So understanding what these variables are is important not only for traders who want to take positions in Bitcoin, but also for economists who want to understand the nature of Bitcoin.”