Breaking Bitcoin: Does Cryptocurrency Exchange Activity Lead to Increased Real Activity Outside Cryptocurrency Exchanges?

Abstract

I employ vector autoregression to identify whether Bitcoin exchange volume shocks increase subsequent real Bitcoin transaction activity outside exchanges. This type of examination is not possible with traditional currency pairs on account of their lack of a perfect ledger mechanism like that of cryptocurrency systems. I find that increased exchange activity has asymmetric effects across user types, with exchange volume innovations tending to stifle the top 100 most popular user wallets than the remaining 2.9 million wallets, many of which are associated with gambling. If you suspect that the exchange activity is for anything other than speculative "hoarding'', the evidence should be found in the transactions between users, and its transmission is very weak. A very persistent response in the exchanges to news innovations was found and is a significant concern from a market manipulation standpoint. Dynamic multipliers were utilized to assess the degree to which money supply increases were distributed across wallet types via transactions. As the money supply increases, I find that the top 100 wallets tend to benefit in the form of increased transactions, while the effect for the millions of remaining wallets remains ambiguous.