Financial uncertainty and the cross-section of cryptocurrency returns

This paper examines whether aggregate uncertainty exposures are associated with the cross-section of cryptocurrency returns. Using 618 cryptocurrencies from April 2014 to December 2021, we find that cryptocurrencies with low financial uncertainty betas outperform those with high betas by approximately 21% per month, a spread comparable in magnitude to the cryptocurrency size return differential documented by Liu et al. (2022). Macroeconomic, policy, and volatility-based uncertainty measures show no cross-sectional return association. To explain this heterogeneity, we develop a novel taxonomy distinguishing investment-oriented from transaction-oriented cryptocurrencies based on design features such as consensus mechanism, supply limits, and anonymity. The financial uncertainty return spread concentrates among investment-oriented coins, consistent with these assets serving hedging functions during periods of financial stress. Trade-level analysis reveals that cryptocurrencies with positive financial uncertainty betas exhibit significantly larger average trade sizes, consistent with institutional hedging demand.