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.

Kraken OTC Head Claims Activity Has Increased 2,000% Since 2018

  • Head of Kraken's OTC desk claims activity has increased twenty-fold since 2018. 
  • Predicts the price of bitcoin will rise as supply drops relative to demand. 

The head of cryptocurrency exchange Kraken’s over-the-counter (OTC) desk claims that the platform has experienced a twenty-fold increase in activity since 2018. 

OTC Trading

Nelson Minier, who leads the OTC division at Kraken, made his statement on the podcast The Scoop on Aug. 20. He claimed that bitcoin and ethereum, which rank first and second in total market capitalization, are the “whales of our desk,” and see the most activity. Minier also estimated that bitcoin cash (BCH), monero (XMR) and USDT made up the remainder of the top five in terms of trading volume. 

The OTC head also gave a prediction for the price of bitcoin, explaining that demand will continue to rise while supply will be cut during next May’s halving,

“I don’t see demand for this asset going down. But I do know that supply is gonna get cut in half, some time May 2019. And I think another thing I know about Bitcoin is that higher price is the best marketing tool we have.”

OTC trading continues to gain popularity as cryptoassets provide an alternative to fiat and the traditional investment markets. More analysts are beginning to refer to bitcoin as a potential “safe haven,” particularly with global economic trouble brewing on the horizon.