Cryptocurrencies Meet Inflation Theory

Using concepts from inflation theory, this study examines the relationship between the returns and volatility of cryptocurrencies. We take Bitcoin, Ethereum, Litecoin and Ripple as the four most popular cryptocurrencies in the market and analyse the relationship between their returns and volatility through the application of GARCH models. The results suggest that Bitcoin and Litecoin behave as a currency subject to inflation showing a causal relationship from returns to volatility [and not the other way around]. In contrast, the results for Ethereum and Ripple show that the causation runs from volatility to returns. Moreover, the volatility of each cryptocurrency is affected by the other three cryptocurrency returns. A panel cointegration analysis shows evidence of a strong cointegration relationship in the cryptocurrency prices