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Price discovery on Bitcoin markets

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Abstract

Trading of Bitcoin is spread about multiple venues where buying and selling is offered in various currencies. However, all exchanges trade one common good and by the law of one price, the different prices should not deviate in the long run. In this context, we are interested in which platform is the most important one in terms of price discovery. To this end, we use a pairwise approach accounting for a potential impact of exchange rates. The contribution to price discovery is measured by Hasbrouck’s and Gonzalo and Granger’s information share. We then derive an ordering with respect to the importance of each market which reveals that the Chinese OKCoin platform is the leader in price discovery of Bitcoin, followed by BTC China. Overall, the exchange rate is neither affected by Bitcoin trading nor does it contribute decisively to its price discovery.

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Notes

  1. For example, the average daily US Dollar foreign exchange trading volume was 1.65 trillion US Dollar in 2016 as opposed to 14 billion trading of Bitcoin in US Dollar.

  2. We have not interpolated the data in the usual way, keeping the last observation as the still valid one until a change is recorded as we believe that the missing data are due to recording errors, not non-trading. Introducing a day’s worth of zero returns, however, substantially discriminates against the respective platform in terms of price discovery. We, therefore, keep only full-time spans in the spirit of Grammig et al. (2005) who restrict the estimation to overlapping trading hours.

  3. Repeating the analysis using the estimated cointegrating vector leads to almost identical conclusions with respect to the identification of the leadership. More precisely, the leadership results are identical when considering the Hasbrouck (1995) information shares. Considering the Gonzalo and Granger (1995) common factor weights, there is one model (model 11) for which the price discovery leadership is altered.

  4. Detailed VECM estimation results for the remaining models 12–15 are not reported as there are no economic implications that would restrict \(\alpha\) or \(\varPsi (1)\) in the bivariate models.

  5. See, for example, https://www.newsbtc.com/2016/12/19/bitcoin-remains-viable-option-avoid-capital-controls-china/.

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Acknowledgements

We thank Dirk Baur, Paolo Giudici and the participants of the First Italian Workshop of Econometrics and Empirical Economics for helpful comments and suggestions.

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  1. University of Pavia, Via S. Felice 7, Pavia, Italy

    Paolo Pagnottoni

  2. University of Tübingen, Sigwartstr. 18, 72076, Tübingen, Germany

    Thomas Dimpfl

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  1. Paolo Pagnottoni
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Pagnottoni, P., Dimpfl, T. Price discovery on Bitcoin markets. Digit Finance 1, 139–161 (2019). https://doi.org/10.1007/s42521-019-00006-x

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