Price Discovery in Bitcoin: The Impact of Unregulated Markets

34 Pages Posted: 20 May 2020 Last revised: 12 Oct 2020

See all articles by Carol Alexander

Carol Alexander

University of Sussex Business School; Peking University HSBC Business School

Daniel F. Heck

University of Sussex Business School

Date Written: April 10, 2020

Abstract

We analyse minute-level multi-dimensional information flows within and between bitcoin spot and derivatives. We show that perpetual swaps and futures traded on the unregulated exchanges Huobi, OKEx and BitMEX are much the strongest instruments for bitcoin price discovery and we examine potential determinants of their leadership strength. Prices on the regulated CME bitcoin futures and the US-based spot exchanges react to, rather than lead, price movements on the unregulated exchanges and they may do so relatively slowly. In a multi-dimensional setting including the main price leaders within futures, perpetuals and spot markets, the CME futures have a very minor effect on price discovery, even less than the spot exchanges Bitfinex, Bitstamp and Coinbase. Our findings highlight the persistent problems stemming from inconsistent regulation in bitcoin spot and derivatives markets, including insufficient price stability and lack of resistance to manipulative trading. We conclude that the SEC are correct to maintain such issues as their main concern for bitcoin ETF applications.

Keywords: Bitcoin ETF, Exchange-Traded Funds, Hedging, Information Shares, Impulse Response, Speculation, Manipulation

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

Suggested Citation

Alexander, Carol and Heck, Daniel, Price Discovery in Bitcoin: The Impact of Unregulated Markets (April 10, 2020). Journal of Financial Stability, Volume 50, October 2020, Article Number 100776, Available at SSRN: https://ssrn.com/abstract=3583843 or http://dx.doi.org/10.2139/ssrn.3583843

Carol Alexander

University of Sussex Business School ( email )

Falmer, Brighton BN1 9SL
United Kingdom

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

Peking University HSBC Business School ( email )

Daniel Heck (Contact Author)

University of Sussex Business School ( email )

Sussex House
Falmer
Brighton, Sussex BNI 9RH
United Kingdom

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