Abstract
We show that cryptocurrency returns relate to asset pricing factors derived from two blockchain characteristics, growth in aggregate computing power and network size. Consistent with theoretical models, cryptocurrency returns have positive risk exposures to these blockchain-based factors, which carry positive risk prices. A stochastic discount factor with computing power and network explains a significantly larger portion of the cross-sectional variation in expected cryptocurrency returns than a model with Bitcoin and cryptocurrency momentum. The explanatory power of the blockchain factors increases over time as the cryptocurrency market matures. Overall, economically motivated factors are important sources of risk for cryptocurrency expected returns.
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