Bitcoin ‘s (BTC) reputation is rising as it is recognized as legal money in more and more territories and countries. With an increasing demand for better strategies for trading Bitcoin, studying the behavior of Bitcoin trading can help investors, as well as traders, figure out a better strategy for maximizing profit with this cryptocurrency. Although Bitcoin trading mostly occurs on weekdays, there is also a high demand for weekend trading, demonstrating high retail participation rates. Thus, varying demands for weekend trading across different areas around the world may lead to predictions that trading patterns are more dependent on the location of trade than the location where the asset is traded. In fact, in the Bitcoin market, there has already been substantial trading on Saturdays and Sundays. Therefore, we also want to test if Bitcoin prices depreciate during local trading hours but appreciate outside of these hours. The research will use data on transactions from trustworthy Bitcoin trading platforms as well as data providers to figure out whether the local time is the main factor in deciding the trading time, which will provide great insight for Bitcoin traders for a better understanding of the market.
The paper focuses on the time of trading Bitcoin as well as figuring out whether the local time is one of the main factors in the timing of trades. By examining commonality in returns and volumes based on 4 BTC currency pairs, which most of the trading is likely to be within one time zone, GBP/BTC (Coinbase Pro), JPY/BTC (Bitflyer), KRW/BTC (Korbit), and ZAR/BTC (Luno), the research points out that volume of exchanges is higher during local working hours. Thus, indicating the view of trading patterns is dependent on the location of trade more than the location where the asset is traded.
The Establishment of Bitcoin Market
Bitcoin is one of the most innovative inventions in human history, first created by a Japanese man, Satoshi Nakamot, based on blockchain technology. The creation of Bitcoin is the solution for the counterparty to spend twice more without being detected immediately. Bitcoin trading participates in the ultimate process by adding one more block to the block of information of the transaction (between senders and recipients). Moreover, there is also compensation for the miners who spend time, money, and hardware on the competition of solving a “mathematical algorithm” that enables new blocks to be linked to the existing chain of information on the previous transactions of BTCs.
After its first public use in 2008, Bitcoin has become the first and most widely used cryptocurrency, optimizing the process of money transfer with its utility and security. Nowadays, with increasing demand for Bitcoin as a reliable means of transferring money, the Bitcoin market is growing in popularity. Many investors put Bitcoin in their own portfolios, serving as fiat money. Ten years after its creation, the capitalization of the Bitcoin market has marked a significant growth from zero to more than 100 billion USD (October 2018). Along with enormous capitalization, the Bitcoin trading market also operates 24 hours a day with a volume of more than 3 billion USD.
A unique aspect of the Bitcoin market is high levels of participation from individuals, without interference or manipulation from financial institutions or governments. Thus, Bitcoin does not have any home market, which leads to high simplicity in transactions as well as low storage requirement and low transfer cost.
Prices and Returns of Bitcoin in Local Working Hours
The Law of Bitcoin trading is based on arbitrage rule, which ensures that the prices of the Bitcoin be the same worldwide with the “synchronous clock time”, post-exchange rates. However, in the real trading market, there are several cases that show discrepancies between local and global price levels, such as the Korean market in February 2018. In order to trade Bitcoins, traders have to compensate for an average premium of 4.73% (Choi, Lehar, & Stauffer, 2018). In a report in 2018, Makarov and Schoar also showed constant large deviations when the large Bitcoin price was appreciated. For a better understanding of these assumptions, the hypothesis below will be tested to see if the location of Bitcoin transactions is the main factor of changes in Bitcoin prices across exchanges.
Firstly, we want to figure out similarity of responding to information across the exchanges based on the correlation of daily returns among possible currency pair from the four chosen pair during January – May 2018 period (with p < 0.001, which are May 2018 period (with p < 0.001, which are:
We can see that all possible combinations of currency pair have significant correlation coefficient, which are greater than 0.89. The strong relationship among these variables shows that there is a commonality of Bitcoin prices across exchanges.
Secondly, we also want to test the liquidity of the Bitcoin market using data from daily high and low prices of Bitcoin during January 2018.
Panel A shows the mean and standard deviation of 30 days spreads of each currency pair. After that, in panel B, we make tests of equality of means daily spreads for Bitcoin for each currency pair and showing the p-value of each possible combinations of currency pair. In panel C, there is a comparison among the selected 30 matching equities and the GBP/BTC as well as JPY/BTC. In this panel, we can see that GBP/BTC and its matching values have the following means of 0.0274 and 0.0064, and JPY/BTC and its matching values have the means of 0.0235 and 0.0051. These statistics show that both BTC currency pair has a larger spread than its own matching equities, which does not support our hypothesis of liquidity of Bitcoin market. On the other hand, in panel D, we apply another method of measurement called Amihud to make a comparison of two above BTC currency pairs with its own matching equities. In this case, we find that both means of BTC currency pair are much smaller than its corresponding matching values’ means. This result does support the hypothesis of liquidity of the Bitcoin market. Ultimately, we want to check for our predictions of Bitcoin in weekdays: Bitcoin prices depreciate during local trading hours but appreciate outside of these hours.
In this test, we defined the working hours are from 8 a.m to 5 p.m (10 hours), while the remaining hours will be the nonworking hours (14 hours). Based on the data during January – May 2018 period, this table shows us the mean and standard deviation of daily returns for working and non – working hours of each BTC currency pairs. From these results, we apply the t-test to test the equality in mean returns for each BTC currency pair in two chosen periods. With the results, we cannot deny the null hypothesis of means of returns’ equality. Therefore, we cannot find evidence to conclude price depreciation during local trading hours.