Price Discovery and Efficiency in Bitcoin Markets

22 Pages Posted: 13 May 2019

See all articles by Carol Alexander

Carol Alexander

University of Sussex Business School

Daniel F. Heck

Technical University of Munich (TUM)

Date Written: May 5, 2019

Abstract

We use high-frequency data on CME and CBOE futures to analyse their role in leading bitcoin price formation. Their position risk is too large to be useful hedging instruments -- this role is largely fulfilled by BitMEX futures -- and instead we examine their speculative role. The CBOE contracts have recently been withdrawn, but they appear to have led some significant spot price falls on 14 November 2018. Besides hedging on BitMEX futures, efficiency in bitcoin markets is promoted by high-frequency arbitrage between spot prices on different centralised exchanges. We implement standard pairs-trading strategies on price spreads between the five largest exchanges showing that, after transactions costs, profits from 10-minute trading signals were driven down to almost zero by the end of 2018. We conclude that bitcoin spot markets are now highly efficient and it now requires algorithms for ultra-high-frequency trading to make any significant arbitrage returns.

Keywords: Cointegration, Cryptocurrency, Hedging, Information Share, Price Manipulation, Speculation

JEL Classification: C22, C5, E42, F31, G1, G2

Suggested Citation

Alexander, Carol and Heck, Daniel, Price Discovery and Efficiency in Bitcoin Markets (May 5, 2019). Available at SSRN: https://ssrn.com/abstract=3383147 or http://dx.doi.org/10.2139/ssrn.3383147

Carol Alexander (Contact Author)

University of Sussex Business School ( email )

Falmer, Brighton BN1 9SL
United Kingdom

HOME PAGE: http://www.carolalexander.org

Daniel Heck

Technical University of Munich (TUM) ( email )

Munich, DE Bavaria
Germany

Register to save articles to
your library

Register

Paper statistics

Downloads
35
Abstract Views
208
PlumX Metrics