Peer Co-Movement in Crypto Markets

We show that peer linkages induce significant price co-movement in crypto markets. When large negative shocks hit one crypto, the peers of that crypto experience abnormally positive performance. These effects are primarily concentrated among smaller peers and revert after about 8 weeks, resulting in predictable returns. Trading strategies that exploit the reversal of the peer effects we uncover are highly profitable. Our findings highlight peer linkages as a key channel driving the co-movement of cryptocurrencies in excess of standard risk factors and correlated demand shocks. We establish our results by identifying crypto peers through co-mentions in online news using novel natural language processing tools