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Investors’ Beliefs and Asset Prices: A Structural Model of Cryptocurrency Demand

Matteo Benetton () and Giovanni Compiani ()
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Matteo Benetton: University of California, Berkeley - Haas School of Business
Giovanni Compiani: University of Chicago - Booth School of Business

No 2020-107, Working Papers from Becker Friedman Institute for Research In Economics

Abstract: We explore the impact of investors’ beliefs on cryptocurrency demand and prices using three new individual-level surveys. We find that younger individuals with lower income and education are more optimistic about the future value of cryptocurrencies, as are late investors. We then estimate the cryptocurrency demand functions using a structural model with rich heterogeneity in investors’ beliefs and preferences. To identify the model, we combine observable beliefs with an instrumental variable strategy that exploits variation in the amount of energy required for the production of the different cryptocurrencies. We find that beliefs explain a large fraction of the cross-sectional variance of returns. A counterfactual exercise shows that banning entry of late investors leads to a decrease in the price of Bitcoin by about $3,500, or approximately 30% of the price during the boom in January 2018. Late investors’ optimism alone can explain about a third of the decline.

Keywords: Beliefs; demand system; cryptocurrencies; surveys; sentiment; retail investors (search for similar items in EconPapers)
JEL-codes: D84 G11 G41 (search for similar items in EconPapers)
Pages: 68 pages
Date: 2020
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