Cryptocurrency co-investment network: token returns reflect investment patterns

TL;DR

This study analyzes how institutional investments influence cryptocurrency market dynamics, revealing that large investors and shared investment patterns significantly impact market behavior and asset correlations.

Contribution

It provides the first comprehensive quantitative analysis of institutional investment patterns and their influence on cryptocurrency market evolution using extensive dataset.

Findings

Market capitalization correlates with institutional investment size.

Prominent investors focus on specific technologies.

Shared investors lead to similar market behaviors among assets.

Abstract

Since the introduction of Bitcoin in 2009, the dramatic and unsteady evolution of the cryptocurrency market has also been driven by large investments by traditional and cryptocurrency-focused hedge funds. Notwithstanding their critical role, our understanding of the relationship between institutional investments and the evolution of the cryptocurrency market has remained limited, also due to the lack of comprehensive data describing investments over time. In this study, we present a quantitative study of cryptocurrency institutional investments based on a dataset collected for 1324 currencies in the period between 2014 and 2022 from Crunchbase, one of the largest platforms gathering business information. We show that the evolution of the cryptocurrency market capitalization is highly correlated with the size of institutional investments, thus confirming their important role. Further, we find that the market is dominated by the presence of a group of prominent investors who tend to specialise by focusing on particular technologies. Finally, studying the co-investment network of currencies that share common investors, we show that assets with shared investors tend to be characterized by similar market behavior. Our work sheds light on the role played by institutional investors and provides a basis for further research on their influence in the cryptocurrency ecosystem.