Psychological Anchoring Effect, the Cross Section of Cryptocurrency Returns, and Cryptocurrency Market Anomalies

This paper investigates whether investors’ anchoring bias matters for the cross section of cryptocurrency returns. Following the convention, we use the nearness of the current cryptocurrency price to N–day high as the proxy of anchoring. Both portfolio–level analysis and coin–level cross–sectional regressions present a strong positive cross–sectional association between anchoring and future cryptocurrency returns. Further evidence indicates that the anchoring effect we document fully dominates a series of well–known cryptocurrency market anomalies such as downside risk, idiosyncratic volatility, lottery-like behavior and momentum. Due to the unique setting of the cryptocurrency market (with no earnings announcement and no discounted cash flow valuation), our findings rule out several alternative sources for the anchoring effect