The Pricing of Bitcoin Return as a Risk Factor in the Cross-Section of Expected Stock Returns and The Risk Determinants of Bitcoin-Related Stocks

<p dir="ltr">This thesis aims to understand the nature of Bitcoin and the characteristics of Bitcoin-related equities using established asset pricing frameworks. It involves the empirical testing of two hypotheses. </p><p dir="ltr">The first hypothesis posits that Bitcoin returns should be priced in the cross-section of expected stock returns, with a negative risk premium. Using a sample of 5,091 U.S.-listed stocks from March 2011 to April 2024, the cross-sectional analysis indicates that the risk premium associated with Bitcoin returns is not statistically significant. This finding challenges the “digital gold” narrative, which implies that Bitcoin functions as a safe-haven asset. Instead, the evidence suggests that portfolios with extreme Bitcoin betas consistently yield abnormal negative future returns, revealing a non-linear, inverted U-shaped relationship between Bitcoin beta and expected stock returns. While abnormal negative returns align more closely with speculative behavior, the interpretation regarding Bitcoin’s role remains theoretically challenging, as portfolios with the lowest Bitcoin betas also exhibit abnormal negative returns. </p><p dir="ltr">The second hypothesis examines the risk determinants of Bitcoin-related stocks. This analysis is based on a sample of 20 Bitcoin-holding firms listed in the U.S. market, covering the three-year period from January 2020 to December 2022. The results indicate that the stock returns of these firms are significantly exposed to daily Bitcoin price fluctuations, exhibiting a positive beta. Additionally, the stock returns of Bitcoin-mining firms in the sample are significantly influenced by changes in Bitcoin mining difficulty, with a negative sensitivity—an effect not observed in other types of Bitcoin-holding firms. This suggests that Bitcoin-specific risk factors beyond price fluctuations may play a role in the risk-return dynamics of Bitcoin-related equities. Furthermore, a reverse size effect is observed within this sector: Bitcoin-related firms with larger market capitalizations tend to generate higher returns compared to smaller firms. This finding holds important implications for industry practice since it challenges the conventional belief that smaller stocks typically yield higher returns.</p>