Price Discovery and Microstructure in Ether Spot and Derivative Markets
26 Pages Posted: 16 Jan 2020 Last revised: 4 Jun 2020
Date Written: May 20, 2020
Ethereum is an important blockchain, being the first and most popular public platform for the smart contracts underpinning financial transactions, time-stamping of supply chains, decentralized applications and initial coin offerings. Ethereum's cryptocurrency, ether, is actively traded on centralized exchanges, second only to bitcoin. It has attracted investor's interest primarily because of its intrinsic value -- small units of ether called `gas' are used, essentially, as the fuel driving smart contract transactions on the Ethereum blockchain. We ask whether off-chain trading on ether derivatives plays a dominant role in ether spot price discovery, thereby driving ether's utility value for on-chain activity. Using minute-by-minute data we find that the ether perpetual swap on BitMEX, an unregulated cryptocurrency derivative exchange, has dominant trading volume and price discovery over the major spot exchanges. Furthermore, we identify interesting hour-of-day and day-of-week effects in trading volume on the spot exchanges, and these indicate that more informed institutional players are trading ether spot and derivatives.
Keywords: BitMEX, Cryptocurrency, Ethereum, Futures, Perpetual Swaps
JEL Classification: G13, G14
Suggested Citation: Suggested Citation