Research: Why Are Cryptocurrency Prices So Volatile?

Kevin O'Brien

New research carried out by Daniele Bianchi and Alexander Dickerson at the University of Warwick suggest well-informed traders with information asymmetries are driving big price swings by timing markets in a manner where others follow in their footsteps.

The information was revealed in the latest draft of a research paper entitled Trading Volume In Cryptocurrency Markets", compiled by Assistant Professor of Finance Daniele Bianchi and Alexander Dickerson, a Ph.D. student, both of the Warwick Business School.

The duo looked at intraday price and volume data from CryptoCompare to assert “that the interaction between past volume and returns positively and significantly predicts future returns," according to a release by the Warwick Business School.

Traders Drive Price Swings

The release noted how the findings remain consistent with exisiting models:

“consistent with existing theoretical models which postulate that informed traders who speculate on their private information are key drivers of the observed price changes.”

Bianchi wrote how “the cryptocurrency market is the perfect environment to exploit asymmetric information,” since its opaque nature gives those with information the ability to “time the market, make money, and drive the prices.”

The authors of the research tracked 26 cryptocurrencies across 150 exchanges to gather information about markets. The cryptoassets were tracked between January 1st, 2017 to May 10th, 2018, covering the boom and bust of the 2017 bull market.

Patterns With Other Asset Classes?

In the conclusion of the report, Bianchi and Dickerson wrote how their empirical evidence helps give more insights into the crypto market by offering comparisons with traditional ones like FX.

They explained how the evolving cryptoasset class “may not necessarily be different from long-established and more mature markets.”

However, previous research by Bianchi found no crypto trading correlations ‘with any economic indicators that investors would base decisions on or with commodities.’

In a working paper called Cryptocurrencies as an Asset Class: An Empirical Assessment, the professor explained how crypto pricing was influenced by previous returns and the emotions and moods of investors.

Bitcoin Stabilizes at $3,550 as Analyst Warns It May Still Retest Recent Lows

Bitcoin, the flagship cryptocurrency, has seemingly stabilized around the $3,550 mark as it has been trading around it after it fell from slightly over $4,000 on January 10. The cryptocurrency, despite its relatively subdued performance, held on after the Cboe pulled its Bitcoin ETF proposal.

According to CryptoCompare data BTC is currently trading at $3,560 after falling about 1% in the last 24-hour period. In the last few hours the cryptocurrency touched the $3,600 mark but soon came back to its stable point. Its market cap is at $62.2 billion.

Bitcoin's price performance in the last 30 days

In the last 30 days, the cryptocurrency has seen a $4,100 high but after successive sell-offs it seemingly entered a range between the $3,500 and $3,800 marks. Data from BuyBitcoinWorldwide shows the cryptocurrency’s 30-day volatility index has dropped 1.5% this month.

Speaking to MarketWatch David Thomas, director and co-founder of cryptocurrency brokerage firm Global Block, stated that BTC may still retest its low seen in December of last year. Thomas was quoted as saying:

An inability of BTC to remain above the 21-day moving average means that a sustained break of the $3,500 level remains high which would then put the December lows of $3,100 firmly back on the map and give the bears back control.

The analyst added that while overall the market is positive on BTC for the medium and long term, there “still seems to be a widely held view that BTC is not out of the woods yet and a retest of the lows is on the cards.”

Notably throughout the bear market BTC has seen various developments, that some believe would justify a recovery. As covered its layer-two scaling solution, the Lighting Network (LN), surpassed the 500 BTC capacity, while SegWit adoption has kept on growing.

Moreover, Nasdaq’s vice president of communications, Joseph Christinat, has confirmed that the world’s second-largest exchange by market cap will be launching bitcoin futures in the first half of this year. Bakkt has also started hiring for its futures exchange.

Other top altcoins are also down in the last 24 hours. Ether’s price has seemingly been accompanying that of bitcoin, as it’s down by about 1% in said period, trading at $116.2. XRP dropped 1.3% to $0.31.

EOS, TRON, Zcash, and Bitcoin Cash have all dropped between 1.3% and 1.8% in said period, with BCH dropping the most to $126.7. Litecoin is notably up 0.16%, as it’s trading at $32.3.