'Information asymmetry' drives huge price swings in cryptocurrencies
By Caoimhe Toman
Date: Thursday 15 Nov 2018
(Sharecast News) - New research has found informed traders and investors' information asymmetry could be driving huge price changes in cryptocurrencies.
Researchers from Warwick Business School used intraday prices and volume data to investigate if the dominant view that trading activity in cryptocurrency markets predominantly consists of investors speculating on information asymmetries has any foundation.
The interaction between past volume and returns positively and significantly predicts future returns, said researchers Daniele Bianchi and Alexander Dickerson, meaning traders speculating on their private information could be key drivers of price changes.
Dr Bianchi said: "The cryptocurrency market is the perfect environment to exploit asymmetric information.
"Its opaque nature and the fragmented system where it mixes web-based brokers and peer-to-peer exchanges with regular major exchanges, which the small exchanges rely on for liquidity, means those who have the information can time the market, make money and drive the prices.
"To test this, we constructed a reversal trading strategy based on volume and past returns and found that it does not correlate with volatility, aggregate market returns, or strategies built on past performances, so it is really volume that has the relevant information."
Dr Bianchi believes the research also shows how Bitcoin-centric the cryptocurrency market is, just as the US dollar is in the FX market, where similar moves can be found.
He added: "Unlike more mature, centralised, markets - such as equity - trading in cryptocurrency is inherently generated by an opaque information flow.
"Cryptocurrency markets are made by a highly fragmented, multi-platform structure which is populated by vastly different operators.
"This means the interaction between trading volume and price changes can actually help shed some light on investors' trading motives, especially as there are no closing times in cryptocurrency markets."
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