Essays on cryptocurrency and behavioral finance

Abstract

This thesis consists of two essays on cryptocurrency and behavioral finance. The first essay introduce the development of cryptocurrency worldwide and overtime. I summarize and analyze critical issues in cryptocurrency area, including a variety of emerging cryptocurrencies, the development of crypto exchanges, regulators’ concerns in cryptocurrency, and the impact of central bank digital currency and Facebook’s Libra. The second essay uses a unique dataset from a cryptocurrency exchange that contains transaction data and demographic data. I analyze the trading patterns across different cryptocurrencies conditional on the personal traits and currency traits. I summarize ten facts based on the empirical findings, which offer supports to my qualitative analysis in the first essay of this thesis. The ten facts about cryptocurrency exchanges and cryptocurrency trading are as following: 1)Individuals hold cryptocurrency portfolios of small value, 2) they trade very fewcryptocurrencies, 3) their trading patterns are very concentrated, and 4) their trading horizon is very short. 5) Cryptocurrency characteristics explain how much they are traded and how long they are held in investors' portfolios. 6) Most of the trades occur between individual investors and institutional investors and market makers play a minor role in the exchange. 7) It is difficult to benchmark portfolio returns because investors' portfolios are not diversified enough, but 8) institutional investors do not outperform individual investors. 9) Individual investors' make good trading decisions, in the sense that the cryptocurrencies they buy outperform the ones they sell. 10) The same is not true for institutional investors.