JP Vergne | Buzz factor or innovation potential: What explains cryptocurrencies’ returns?

Following the doubling of bitcoin’s price in 2016, trust in the future of cryptocurrencies has been reinforced.

In the past, it was speculated that cryptocurrency price increases could be readily explained by the media buzz around them, and price decreases by their association with fraudulent activities.

Associate Professor Jean-Philippe (JP) Vergne and co-author Sha Wang, a Western University PhD student, provide an alternative view. Instead of assuming cryptocurrencies behave either like traditional currencies (e.g. the U.S. dollar) or commodities (e.g. gold), they argue cryptocurrencies are best understood as technology platforms. And when technology improves, it entails an innovation potential that has market value.

In their paper, Buzz factor or innovation potential: What explains cryptocurrencies’ returns?, they identify factors associated with variations in cryptocurrencies’ market values and show the technological innovation potential underpinning each cryptocurrency is the primary driver of the market value. They also find media buzz is in fact negatively associated with cryptocurrencies’ value and explain this phenomenon by unpacking speculators’ behaviour.

The paper was recently published in PLOS ONE and is the first research paper release from Ivey’s Scotiabank Digital Banking Lab, where Vergne is co-director. The Digital Banking Lab produces research on the impact of digitization and disruption in the financial sector.

Vergne says prior research treated cryptocurrencies mostly as money rather than as technology.

“Researchers never tested the relationship between innovation potential and cryptocurrency prices. But this study shows one simple thing: Cryptocurrency is technology,” he said.