Abstract
We examine price discovery and liquidity provision in the secondary market for bitcoin—an asset with a high level of speculative trading. Based on BTC-e’s full limit order book over the 2013–2014 period, we find that order informativeness increases with order aggressiveness within the first 10 tiers, but that this pattern reverses in outer tiers. In a high volatility environment, aggressive orders seem to be more attractive to informed agents, but market liquidity migrates outward in response to the information asymmetry. We also find support to the Markovian learning assumption often made in theoretical models of limit order markets.
Highlights
Bitcoin is currently the most prominent cryptocurrency with a market capitalization of approximately $116 billion
Our empirical analysis is based on the Ricco et al (2018) model of a dynamic limit order market with asymmetric information and non-Markovian learning
Earlier research into the information content of limit order books, such as Cao et al (2009), does not go this far into the limit order book. It is not clear if we would have seen the same pattern had we examined equity market limit order books beyond the 10th tier, or if this is a peculiar feature of the bitcoin market in which the extreme volatility might increase the probability of execution for further-away orders, thereby inducing informed traders to post more of such orders
Summary
Our paper belongs to the small but growing literature that focuses on the microstructure of the secondary market for bitcoin and determinants of bitcoin returns. We review some of the relevant papers in the first subsection. We state the hypotheses of direct interest that are subsequently tested in our empirical analysis
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