Fear of the Coronavirus and Cryptocurrencies' returns

Do Cryptocurrencies fear Coronavirus? This paper answers this question by examining the predictive power of the Covid-19 global fear index of Salisu and Akanni (2020) on major cryptocurrencies' returns during the period from 07/02/2020 to 05/03/2021. First, we formulate a predictive model of major cryptocurrencies' returns based on the Covid-19 global fear index. Second, we combine the global fear of the pandemic with other fear proxies and we present a multiple-factor fear-based predictive model that captures the effects of other economic and financial fear variables. Finally, we examine whether accounting for asymmetries would improve the predictability of returns. The empirical findings show that the global fear index contains information that help predict major cryptocurrencies and that the multiple-factor model is a better predictive model for cryptocurrencies' returns. Specifically, global fear related to health risks exhibits a significantly negative impact on the majority of the sampled cryptocurrencies' returns. Consistent with in-sample results, global fear provides a statistically significant out-of-sample forecast outcome. Our results suggest that, in the period of the pandemic, cryptocurrencies are not very different from other assets and that they exhibit a significant reaction to the fear environment.