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Price discovery in Bitcoin: The impact of unregulated markets

Carol Alexander and Daniel F. Heck

Journal of Financial Stability, 2020, vol. 50, issue C

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 (search for similar items in EconPapers)
JEL-codes: C22 C5 E42 F31 G1 G2 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finsta:v:50:y:2020:i:c:s1572308920300759

DOI: 10.1016/j.jfs.2020.100776

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Journal of Financial Stability is currently edited by I. Hasan, W. C. Hunter and G. G. Kaufman

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