The recent boom in cryptocurrencies has created a universe of new investment possibilities, not just for individual investors but institutional investors, governments, and publicly listed firms as well — with hype to match. Yet as they become more popular, cryptocurrencies have seen enormous fluctuations in price over their relatively short lifespans, adding uncertain risks and returns to the bottom line.
“Risk translation: How cryptocurrency impacts company risk, beta and returns,” a paper published in the Journal of Capital Markets Studies by Jack Field ’23 and Bryant Professor of Finance A. Can Inci, Ph.D., looks beyond both the hype and the doom predictions to gain a true analysis of the novel asset. Through careful investigation, the study, based on Field’s honors thesis, compares the various virtues of different crypto-based strategies, including using cryptocurrency as part of a treasury portfolio versus as a medium of exchange or a commission-based asset.
“Whether from forces of supply and demand, or from complex algorithmic technologies (such as blockchains), or from a mixture of the two, the underlying worth of cryptocurrencies has been an enigma for investors and politicians alike,” the article notes.
The piece, published in May, examines the effect cryptocurrency assets can have on the risk profiles of publicly traded firms. Through a cross-sectional analysis of the daily returns, volatility, betas and Sharpe ratios of the four largest public holders of cryptocurrencies (MicroStrategy Inc., Tesla, Inc., Square Inc., and Marathon Digital Holdings, Inc.) and five of the largest cryptocurrencies by market cap (Bitcoin, Ether, Tether, Ripple, and Dogecoin), the authors measured the risk and return characteristics of holding cryptocurrencies, as well as the motivations behind holding them as an asset class.
Their conclusions demonstrate the difference in return for different crypto-relate strategies, finding that strategies tailored around the utilization of cryptocurrency as part of a treasury portfolio exhibit the most positive effects on common stock risk and returns, while strategies that use cryptocurrencies as a medium of exchange or a commission-based asset yielded relatively poorer outcomes.
They also note the importance of transparency and risk disclosures in firms dealing with cryptocurrencies. “Being such a volatile asset class, cryptocurrencies can introduce uncertainty into a company’s balance sheet, as the value of said assets can change drastically in short periods of time. It is necessary not only for a firm’s managers to understand the implications of cryptocurrencies on total asset values but also for shareholders to have the right to know the true risk in owning equity shares of a company,” Field and Inci state.
Now a compliance analyst at Manulife Investment Management, Field chose to focus his thesis on an emerging area. Research on cryptocurrency use in corporate finance is an especially untrodden research area, the authors note, and their study is one of the first on cryptocurrency investments in the treasury departments of publicly traded companies.
Field, who graduated magna cum laude in December with a major in Finance and concentration in Economics, was one of more than 40 students who completed honors thesis projects this year, ranging from analyzing how match results affect the equity value of publicly traded soccer teams to studying the effects of single-use and fabric facemasks on the environment.
In addition to his role as co-author, Inci also served as Field’s thesis advisor for his project. Field’s editorial advisor was Professor of Finance Hakkan Saraoglu, Ph.D.