Do Connections Pay Off in the Bitcoin Market?

Abstract

This paper identifies the bitcoin investor network and studies the relationship between connections and returns. Using transaction data from the bitcoin blockchain, we reach three conclusions. First, on average, annualized returns of connected addresses in the network are 20.75% above those of their unconnected peers. Second, returns also differ among those connected addresses. By dividing the connected addresses into ten deciles based on their centrality, we find that addresses in the two most-connected deciles earn higher returns than the other connected addresses. Third, eigenvector centrality is more related than degree centrality to higher returns, implying that quality of connections matters.

Keywords: Bitcoin, Networks, Centrality, Asset Returns

JEL Classification: C55, G11, G14, L14