Fragmentation and Price Discovery in Bitcoin Markets

Abstract

This study uses existing research on competitive fragmentation and price discovery to test its applicability to cryptocurrency markets. Bitcoin (BTC) transaction and order book data is collected across six exchanges for both United States Dollar (USD - $) and Euro (€) order books (2017-2019). A panel-regression model on a multivariate version of Hasbrouck’s (1995) information share is employed. Results confirm that market share has a positive relationship with the informativeness of exchange prices (Madhavan, 1995). This is attributed to informed investors migrating to competing exchanges to better conceal and profit on their superior information. This, in turn, increases events of information asymmetry as exchange prices become more informative and dispersed across an increasing number of exchanges.