Bitcoin Price Anomalies: P2P Trading on LocalBitcoins

Abstract

The purpose of this paper is to understand the high Australian dollar Bitcoin prices on LocalBitcoins (localbitcoins.com), which appear to be out of line with market prices. The findings indicate that the price driver is not a reaction to market conditions, but a consequence of the high risk payment methods deemed acceptable by LocalBitcoins. With sellers being allowed to offer Bitcoins in exchange for gift card codes, Bitcoin is traded at four to five times the market price. These trades are typically small in value and the construction of a value-weighted daily Bitcoin price series reveals more accurately LocalBitcoins’ daily price movements. Benchmarking against CoinDesk’s Bitcoin Price Index (BPI) shows that LocalBitcoins trades can fall above or below this benchmark. When viewed in relation to the LocalBitcoins two market system, a value-weighted price can be calculated to determine a daily premium and discount. Value-weighted prices can also be used to compare trades on LocalBitcoins with the more traditional Bitcoin exchange BTC Markets. These comparisons reveal that prices on LocalBitcoins are not more volatile than prices on BTC Markets or the BPI. It is recommended that any analysis of price behavior on LocalBitcoins take into account the dollar value of the trades to address the adverse impact that high price-low value trades have on volatility. Otherwise, a conclusion of high volatility will continue to persist.