Search
Close this search box.

What causes the huge price swings in cryptocurrencies?

Daniele Bianchi and Alexander Dickerson, of Warwick Business School, used intraday prices and volume data to investigate whether the dominant view that trading activity in cryptocurrency markets predominantly consists of investors speculating on information asymmetries has any foundation.
price

New research has found evidence that informed traders and investors’ information asymmetry is driving the huge price swings in cryptocurrencies. Contributor Daniele Bianchi and Alexander Dickerson – Warwick Business School,

Daniele Bianchi and Alexander Dickerson, of Warwick Business School, used intraday prices and volume data to investigate whether the dominant view that trading activity in cryptocurrency markets predominantly consists of investors speculating on information asymmetries has any foundation.

The authors showed – both intraday and on a daily basis – that the interaction between past volume and returns positively and significantly predicts future returns. This is consistent with existing theoretical models which postulate that informed traders who speculate on their private information are key drivers of the observed price changes.

The research also has practical implications for cryptocurrency trading as a conditional reversal strategy, based on past returns and volume, generated a risk-adjusted annualised return net of transaction costs of 342 percent and a Sharpe ratio – a measure of the return of an investment compared to its risk – of 2.4, with almost zero correlation with Bitcoin dollar returns.

It outperformed conventional portfolio strategies such as momentum, even when transaction costs were included. Dr Bianchi said: “The cryptocurrency market is the perfect environment to exploit asymmetric information.”

“Its opaque nature and the fragmented system where it mixes web-based brokers and peer-to-peer exchanges with regular major exchanges, which the small exchanges rely on for liquidity, means those who have the information can time the market, make money and drive the prices.

“To test this, we constructed a reversal trading strategy based on volume and past returns and found that it does not correlate with volatility, aggregate market returns, or strategies built on past performances, so it is really volume that has the relevant information.”

A slightly similar market structure can be found in Foreign Exchange (FX) markets. However, with previous research showing that the dynamics of cryptocurrency returns and volume is neither bound by economic fundamentals nor correlated with traditional asset classes, FX included, the researchers warn not to expect trading activity in cryptocurrency markets resembling anything like existing asset classes.

The authors tracked 26 cryptocurrencies over 150 exchanges from January 1, 2017, to May 10, 2018, when the cryptocurrency market experienced a huge boom during December 2017 and January 2018, a major collapse from February 2018 to April 2018 and then traded sideways. These major currencies cover more than 90 percent of the trading volume of coins using Bitcoin as the base currency.

Dr Bianchi believes the research also shows how Bitcoin-centric the cryptocurrency market is, just as the US dollar is in the FX market. He added: “Unlike more mature, centralised, markets – such as equity – trading in cryptocurrency is inherently generated by an opaque information flow.

“Cryptocurrency markets are made by a highly fragmented, multi-platform structure which is populated by vastly different operators. This means the interaction between trading volume and price changes can actually help shed some light on investors’ trading motives, especially as there are no closing times in cryptocurrency markets.”


Receive more HR related news and content with our monthly Enewsletter (Ebrief)

Read more

Latest News

Read More

Rise in recruitment fraud must urgently be checked

28 March 2024

Newsletter

Receive the latest HR news and strategic content

Please note, as per the GDPR Legislation, we need to ensure you are ‘Opted In’ to receive updates from ‘theHRDIRECTOR’. We will NEVER sell, rent, share or give away your data to third parties. We only use it to send information about our products and updates within the HR space To see our Privacy Policy – click here

Latest HR Jobs

University of Cambridge – Judge Business SchoolSalary: £32,332 to £38,205 pa, pro rata

University of Cambridge – Judge Business SchoolSalary: £29,605 to £33,966 pa, pro rata

University of Oxford – Blavatnik School of GovernmentSalary: Grade 5: £28,759 – £33,966 per annum (with a discretionary range to £37,099)

Software Development Director (Exec Team Seat). Remote Working with Ellesmere Port Office-Based Minimum 1 Day Per Week. + Contribution towards membership fees. £120,000 – £140,000

Read the latest digital issue of theHRDIRECTOR for FREE

Read the latest digital issue of theHRDIRECTOR for FREE