Do Fundamentals Drive Cryptocurrency Prices? By Siddharth M. Bhambhwani, Stefanos Delikouras and George M. Korniotis

1. Background and Literature Review
We preface our analysis with a brief discussion on cryptocurrencies, computing power, and
network. We also provide a brief literature review and present our central hypothesis.

1.1. Cryptocurrencies and Blockchain
There are two types of cryptocurrencies: mineable and non-mineable ones. In our main anal-

ysis we focus on five prominent mineable cryptocurrencies, namely Bitcoin, Ethereum, Mon-

ero, Litecoin, and Dash. Mineable cryptocurrencies are rewards to solving a cryptographic
algorithm via a process known as mining. The miner that first solves the cryptographic algo-

rithm generates a block and receives a reward. The block reward is in units of the respective
cryptocurrency. In the process of mining blocks, miners verify transaction records into that
block, which is then added (i.e., chained) to the prior block, thereby forming the blockchain
(Nakamoto, 2008; Narayanan, Bonneau, Felten, Miller, and Goldfeder, 2016). By verifying
transactions, miners also receive a fee for each transaction they record in the block.
Contrary to mineable cryptocurrencies, the distribution and creation of non-mineable
cryptocurrencies (NMCs) is decided ex-ante and is generally based on the protocol of their
founders. Cong, Li, and Wang (2018) discuss the economics of non-mineable currencies,
which they refer to as “tokens.” We exclude NMCs from our main analysis because the
absence of mining activity implies that they do not have a measure of computing power.
However, we use NMCs in our out-of-sample robustness tests presented in Section 5.1.
1.2. Computing Power
An important characteristic of blockchains of mineable cryptocurrencies is computing power.
Computing power is measured in hashes, with one hash referring to one function solved by a
computer. Saleh (2018) argues that computing power is related to the resources expended to
maintain the blockchain. Specifically, he reports that Bitcoin and Ethereum, which have the
highest computing powers of all cryptocurrencies, “collectively consume more energy on an
annual basis than all but 69 countries individually.” Unfortunately, there is no data available
for the energy consumption of most cryptocurrencies. Thus, we use computing power as a
proxy for overall resources spent on crypto-mining, including electricity.
Computing power is important because it facilitates the fast and secure record-keeping

Do Fundamentals Drive Cryptocurrency Prices? By Siddharth M. Bhambhwani, Stefanos Delikouras and George M. Korniotis