Effect of Bitcoin spot and derivative trading volumes on price volatility

Abstract

This study argues that the value of Bitcoin is dependent on the likelihood of its price volatility reducing in the future. This study attempted to shed light on whether increased speculation, in both spot and derivative market volumes, will eventually lead to a reduction in Bitcoin price volatility. The study investigates several factors that influence Bitcoin volatility and tests empirically whether trading volumes in the spot market and trading volumes in the new derivative markets have had an effect on the price volatility. The study used, among other tests, an ARCH(1) and Granger-causality test and found that spot trading volumes had a significant positive effect on price volatility in the study period. The study also found that, in the year of introduction of Bitmex derivative contracts, derivative trading volumes had a significant negative effect on Bitcoin price volatility. In the years thereafter though, the relationship was not sustained and therefore it is not definitive whether derivative contracts trading volume increases has led to reduced volatility in the Bitcoin price.