Between Governance and Capital Restrictions: Determinants of Bitcoin Trade Volume in Decentralized Markets

Abstract

We analyze the determinants of BTC trade volume in decentralized exchanges (DEXs) and test the claim that BTC trades on these platforms are censorship-resistant. The study finds that overall economic freedom, particularly monetary freedom, correlates indirectly with BTC trade volumes, while capital restrictions on residents’ transactions abroad correlate in two different directions. Purchase transactions inversely correlate with BTC volume in DEXs, while sales transactions correlate directly. These results suggest that BTC can be used to hedge against poor institutional frameworks, particularly against poor monetary governance, and can be used as a vehicle for institutional hedging against repressive capital controls and institutional failures. The study’s originality lies in its use of on-chain panel data on the volume of BTC transactions, which are country-specific and allow for the comparison of the impact of country-specific socio-institutional variables on BTC volumes.

Keywords: bitcoin; crypto-assets; decentralized markets; institutions; trade volume

JEL Classification: G12; G23; G41; K20; O16