Intertemporal asset pricing with bitcoin

This paper develops and tests an intertemporal regime-switching asset pricing model characterized by heterogeneous agents that have different expectations about the persistence and volatility of bitcoin prices. The model is estimated using daily bitcoin price data from 2013 until 2020 whereby three types of agents are considered: mean–variance optimizers, speculators and fundamentalists, respectively. While mean–variance optimizers trade on the basis of conditional first and second moments of the return distribution, speculators engage in trend chasing and buy when prices are rising and sell when prices are declining. Fundamentalists trade on the basis of fundamental factors that can impact the value of bitcoin. The fractions of agents engaging in one strategy over another shows statistically substantial variation during high and low bitcoin price volatility regimes. Estimation results reveal the following. First, unlike in traditional asset classes, there is evidence of mean–variance optimizers. Second, there is evidence of speculators who engage in ‘bandwagon behavior’ and buy bitcoins during price appreciations and sell bitcoins during price declines. Finally, there is evidence of fundamentalists who trade bitcoins when fundamental factors deviate from their long-run trends. Remarkably, these fundamentalists exhibit contrarian-type behaviors during low price volatility regimes while behaving more like fundamental traders during high price volatility regimes.