Cryptocurrency Returns before and after the Introduction of Bitcoin Futures

Pinar Deniz,Thanasis Stengos

doi:10.3390/jrfm13060116

Pinar Deniz, Thanasis Stengos

Open Access

https://doi.org/10.3390/jrfm13060116

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Abstract

This paper examines the behaviour of Bitcoin returns and those of several other cryptocurrencies in the pre and post period of the introduction of the Bitcoin futures market. We use the principal component-guided sparse regression (PC-LASSO) model to analyze several sample sizes for the pre and post periods. Besides the neighbourhood of the break time, the current period is also investigated as returns start to recover after some time. Search intensity is observed to be the most important variable for Bitcoin for all periods, whereas for the other cryptocurrencies there are other variables that seem more important in the pre period, while search intensity still stands out in the post period. Furthermore, GARCH analyses suggest that search intensity increases the volatility of Bitcoin returns more in the post period than it does in the pre period. Our empirical findings suggest that the top five cryptocurrencies are substitutes before the launch of Bitcoin futures. However, this effect is lost, and moreover, there are spillover effects on altcoins during both the post and the recovery period. We find a spillover effect of the introduction of bitcoin futures on altcoins and this effect seems to persist during the recovery period.

Highlights

IntroductionCryptocurrencies have recently received attention both by the investors and technology-lovers due to several reasons such as: (i) they facilitate transactions by lowering costs and time-spending due to their peer-to-peer structure, i.e., excluding intermediaries and rendering the cryptocurrency-holder the governor of the account; (ii) they provide privacy in transactions which may matter for those who worry about account theft; (iii) they present relatively higher returns to the investors due to their volatile structure; (iv) they are not controlled by a central authority like other financial assets which provides an alternative for novelty-seekers; (v) they are popular and have already started to take part in the daily business and financial news network; (vi) last but not least, they have started to be used as a medium of exchange, such that you can buy yourself a cup of coffee with your coins.The first digital currency, Bitcoin (BTC), created by the anonymous identity Satoshi Nakamoto (2008), is still dominating other cryptocurrencies by market capitalization
This study investigates the behaviour of cryptocurrencies before and after the launch of Bitcoin futures market by 10 December 2017
The results suggest Google search intensity as the most important variable for Bitcoin returns for all samples

Summary

Introduction

Cryptocurrencies have recently received attention both by the investors and technology-lovers due to several reasons such as: (i) they facilitate transactions by lowering costs and time-spending due to their peer-to-peer structure, i.e., excluding intermediaries and rendering the cryptocurrency-holder the governor of the account; (ii) they provide privacy in transactions which may matter for those who worry about account theft; (iii) they present relatively higher returns to the investors due to their volatile structure; (iv) they are not controlled by a central authority like other financial assets which provides an alternative for novelty-seekers; (v) they are popular and have already started to take part in the daily business and financial news network; (vi) last but not least, they have started to be used as a medium of exchange, such that you can buy yourself a cup of coffee with your coins.The first digital currency, Bitcoin (BTC), created by the anonymous identity Satoshi Nakamoto (2008), is still dominating other cryptocurrencies by market capitalization. The Bitcoin price had seen an exponential rise until its drop-down in December 2017, which coincided with the introduction of the futures market (Corbet et al 2018; Hale et al 2018), even though this may be the result of an expected behaviour of a newly-established asset due to speculations (Stein 1987). Some studies investigate the behaviour of Bitcoin whether it is a speculative investment or a currency (Aalborg et al 2019; Bouoiyour and Selmi 2015; Corbet et al 2018; Yermack 2015). In the literature, regarding their impact on cryptocurrencies, several macroeconomic and financial variables are investigated such as: search intensity (Dastgir et al 2019; Kristoufek 2013; Panagiotidis et al 2019); gold prices (Dyhrberg 2016a, 2016b; Wu et al 2019); and (policy) uncertainty (Bouri et al 2017b; Demir et al 2018; Panagiotidis et al 2019; Wu et al 2019)

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