Michigan Ross’s Rajan: Bitcoin Drives The Crypto Train

Uday Rajan of Michigan Ross is Poets&Quants' Professor of the Week for his research on Bitcoin

Uday Rajan of Michigan Ross is Poets&Quants’ Professor of the Week for his research on Bitcoin

Cryptocurrencies may not be as hyped as they were in late 2017 and 2018, but they have rebounded nicely from their lows after the crypto bubble burst. The crypto market, worth more than $800 billion at its peak, now has a market capitalization just shy of $250 billion, about what it was in November 2017.

Cryptocurrencies have been around for a while, but as they proliferate (the website coinmarketcap.com tracks more than 2,000 of them) and more data becomes available, academics have started studying the crypto phenomenon more intently.

One of the latest and most thorough studies comes from Poets&Quants’ Professor of the Week, Uday Rajan of the University of Michigan’s Ross School of Business. The working paper, called  Cryptocurrencies: Stylized Facts on a New Investible Instrument” and written in 2018, was co-authored by Christine Parlour of the Haas School of Business at UC Berkeley and former Haas graduate student Albert Hu.  


Rajan and his colleagues were able to quantify cryptocurrencies’ daily volatility—it’s huge—and compared coin offerings to initial public offerings of stocks. But their most important finding was how much the crypto solar system revolves around Bitcoin, the biggest and best-known cryptocurrency.

Cryptocurrency is a form of digital currency that uses encryption for security. Some cryptocurrencies, like Bitcoin, use blockchain technology to register transactions and public and private “keys” to securely transfer cryptocurrencies between users. It has no central or issuing authority, like a central bank, but is instead decentralized, which is a big part of its appeal.

Bitcoin dominates the crypto market by sheer size—it’s market value of $136 billion as of June 6th comprised more than half the total market capitalization of the whole crypto universe, according to coinmarketcap.com. That and its tradability compared with the many less liquid crypto instruments makes it the benchmark for the whole asset class.


Using the CoinMarketCap database for 2013 to 2017, the researchers tracked the price movements of Bitcoin and 221 alternative cryptocurrencies. They found that the mean correlation–a measure of how much any two variables moved in tandem—between the crypto alternatives and Bitcoin was higher (0.17 to 0.21) than for either gold or the excess return of the S&P 500 index, which were both near zero. The highest correlation between two asset classes is 1, while -1 means they’re going in the opposite direction. Individual cryptocurrencies had correlations with Bitcoin as high as 0.5.

The researchers also were able to quantify the volatility of cryptocurrencies—their mean daily return over the period of their sample was what they called a “remarkable” 2.53% (median return of 1.8%) as of late November 2017. With the Dow Jones Industrial Average trading around 25,000, that would be the equivalent of 500-600 Dow points a day. 

Rajan and his co-authors also did a deep dive into initial coin offerings (ICOs), a popular way for investors to get into what has been to date an unregulated financial market. By contrast, initial public offerings of stocks (IPOs) are heavily regulated and tightly controlled by issuers and their investment banks. 


The researchers examined 64 ICOs that took place between 2013 and 2017. During that time of increasing interest in crypto, the median pop for the first day’s trading in the ICO was 115%, and the ICOs added 29% more over the first month. 

Some 98 U.S. IPOs had a mean first-day return of 12.1% in 2016, with a mean return to the end of the year of 26.5%. “IPO returns appear to be significantly less volatile than ICO returns,” the researchers write.

Rajan, 55, the David B. Hermelin Professor of Business Administration and the Chair of Finance and Real Estate at Michigan Ross, focuses his research on “informational frictions” such as adverse selection and moral hazard and how they affect market transactions. He recently taught classes in valuation and financial management for MBAs and how to model asymmetric information for Ph.D. students.

Rajan got his BA from the University of Delhi, his master’s degree from Carnegie-Mellon University (where he also taught for a few years), and his Ph.D. in economics from Stanford. He has been at Michigan Ross since 2004. 

Early in his career, he was vice president of fixed income research at Drexel Burnham Lambert, the firm that “junk bond king” Michael Milken made famous—and controversial—before its historic collapse in 1990.

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