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Price discovery in Bitcoin: The impact of unregulated markets

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  • Alexander, Carol
  • Heck, Daniel F.

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.

Suggested Citation

  • Alexander, Carol & Heck, Daniel F., 2020. "Price discovery in Bitcoin: The impact of unregulated markets," Journal of Financial Stability, Elsevier, vol. 50(C).
    • Handle: RePEc:eee:finsta:v:50:y:2020:i:c:s1572308920300759
    DOI: 10.1016/j.jfs.2020.100776
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    More about this item

    Keywords

    Bitcoin ETF; Exchange-traded funds; Hedging; Information shares; Impulse response; Speculation; Manipulation;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services

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