BITCOIN AND THE CROSS-MARKET EFFECTS OF THE MT. GOX MELTDOWN

Abstract

Bitcoin is a well known cryptocurrency that has existed for over a decade. We examine the historical cross-market dynamic relationships among four important Bitcoin cryptocurrency markets at a pivotal point in cryptocurrency acceptance among markets and the public. We pay particular attention to cross-market relations during the introduction of a new, competing Bitcoin exchange, Bitfinex, and the subsequent demise of the once-prominent Bitcoin exchange, Mt. Gox. Our findings show that Bitfinex's introduction led to a shifting of trading activity from the once popular Mt. Gox exchange to other exchanges. Mt. Gox's loss of trading activity caused price distortions in all Bitcoin markets under study. In addition, cross-market relationships became less efficient while Mt. Gox experienced its death throes. Our study provides evidence that (1) Bitcoin markets are susceptible to volume losses to rival exchanges, (2) shifting trading activity is also associated with price distortions mainly originating from the suffering exchange, and (3) Bitcoin cross-market dynamics are resilient and, ultimately, self-healing from shocks, strengthening Bitcoin's long-term viability.