State‐Dependent Relationship Between Cryptocurrency Returns and Credit Spreads

ABSTRACT This study investigates how overconfident cryptocurrency traders influence the connection between returns and risk premia, proxied by option‐adjusted credit spreads. Using daily data from January 2021 to February 2025, we uncover asymmetry and state dependence: returns decline when spreads widen, particularly during crashes, yet they do not recover when spreads narrow. Equity indices exhibit more balanced co‐movements. The asymmetry strengthens in high‐volatility periods and persists after we control for broad market returns and after we substitute a composite crypto index for individual cryptocurrencies. These findings indicate a distinctive pricing mechanism in cryptocurrency markets shaped by overconfident behaviour and credit‐spread dynamics.