Do connections pay off in the bitcoin market?

Abstract

This paper identifies the bitcoin investor network and studies the relationship between connections and returns. Using transaction data recorded in the bitcoin blockchain from 2015 to 2020, we reach three conclusions. First, connectedness is not strongly correlated with higher returns in the first four years. However, the correlation becomes strong and significant in 2019 and 2020. Second, returns also differ among those connected addresses. By dividing the connected addresses into ten decile groups based on their centrality, we find that the top 20% most-connected addresses earn higher returns than their peers during most of our sample period. Third, eigenvector centrality is more related to higher returns than degree centrality for the top 20% most-connected addresses, implying that the quality of connections may matter more than quantity among those highly connected addresses.