Bitcoin Investors' Style, Skill, and Sentiment

Abstract

I examine the style and skill of small, medium, and large Bitcoin traders using order book data from the largest U.S.-based exchange, Coinbase. I find that all but the smallest traders are contrarian---they buy when prices have fallen and vice versa---and the larger the traders, the more contrarian they are. Additionally, large Bitcoin traders anchor to the 30-, 90-, and 120-day highs. On the other hand, smaller investors mainly trade based on investor sentiment and attention. Decomposing the order flows, I find that contrarian trades positively predict Bitcoin returns, and consistently, larger traders who are contrarian on average show evidence of market timing skills. On the other hand, sentiment- and attention-induced trading, which are mainly implemented by smaller traders, have no predictive power for returns. Overall, the results are consistent with larger traders being compensated for providing liquidity to smaller investors’ sentiment and attention-driven trades.