Price Discovery of a Speculative Asset: Evidence from a Bitcoin Exchange

49 Pages Posted: 19 Oct 2018

See all articles by Eric Ghysels

Eric Ghysels

University of North Carolina Kenan-Flagler Business School; University of North Carolina (UNC) at Chapel Hill - Department of Economics

Giang Nguyen

Pennsylvania State University - Smeal College of Business

Date Written: September 30, 2018

Abstract

This paper examines price discovery and liquidity provision in the secondary market for bitcoin -- an asset that has no observable fundamentals and is associated with a high level of speculative trading. Based on a comprehensive dataset of the full limit order book of BTC-e over the 2013-2014 period, we find that order informativeness generally increases with order aggressiveness within the first 10 tiers, but that this pattern reverses in the outer layers of the book. In a high volatility environment, aggressive orders seem to be more attractive to informed agents, as reflected by the increased information content of such orders, although market liquidity appears to migrate outward in response to the information asymmetry. We also find that learning in the market does not seem to depend on the history of the limit order book, which lends some initial support to the Markovian learning assumption often made in theoretical models of limit order markets.

Keywords: Bitcoin, cryptocurrency, price discovery, liquidity, price impact, limit order book market, adverse selection, learning

JEL Classification: G10, G12, G14, G19

Suggested Citation

Ghysels, Eric and Nguyen, Giang, Price Discovery of a Speculative Asset: Evidence from a Bitcoin Exchange (September 30, 2018). Kenan Institute of Private Enterprise Research Paper No. 18-31. Available at SSRN: https://ssrn.com/abstract=3258508 or http://dx.doi.org/10.2139/ssrn.3258508

Eric Ghysels

University of North Carolina Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

University of North Carolina (UNC) at Chapel Hill - Department of Economics ( email )

Gardner Hall, CB 3305
Chapel Hill, NC 27599
United States
919-966-5325 (Phone)
919-966-4986 (Fax)

HOME PAGE: http://www.unc.edu/~eghysels/

Giang Nguyen (Contact Author)

Pennsylvania State University - Smeal College of Business ( email )

University Park, PA 16802
United States

HOME PAGE: http://directory.smeal.psu.edu/gxn13

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