Hazy returns: does air pollution affect cryptocurrencies?

Purpose - This study aims to examine whether rising air pollution impacts cryptocurrency returns across different categories. Design/methodology/approach - This study uses panel regression to investigate the impact of air pollution on cryptocurrencies between January 2014 and June 2023. Cryptocurrency prices are sourced fromwww.coinmarketcap.com. Air quality is measured using the air quality index (AQI) values provided by the World Air Quality Index Project. Generalized method of moments (GMM) estimators for dynamic panel regression have also been used to control for endogeneity concerns. Findings - High AQI levels are observed to negatively affect cryptocurrency returns. This impact remains absent during good air quality and for cryptocurrencies with lower energy consumption like stablecoins, clean energy and health cryptocurrencies, supporting the argument that rising air pollution leads to lower returns for cryptocurrencies more prone to damaging the environment. Practical implications - The findings of this study could offer investors valuable insights in formulating more efficient cryptocurrency trading strategies. It also demonstrates how environmental variables influence the performance of volatile assets like cryptocurrencies. The presence of lower returns for currencies perceived as damaging to the environment could put the focus on promoting sustainability in the production of such digital currencies. Originality/value - No prior study has investigated the influence of AQI on cryptocurrency returns. This study aims to focus on the behavioral aspect of financial decision-making. As cryptocurrency adoption rates rise across the globe, the findings of this study can provide useful insights to cryptocurrency traders.