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.

Ether (ETH) Mysteriously Flash Crashed 20% on Poloniex

The price of the second-largest cryptocurrency by market cap, Ethereum’s ether, has mysteriously flash crashed roughly 20% on Poloniex.

The crash occurred on the ETH/BTC trading pair and saw the cryptocurrency go from around 0.021 BTC to around 0.017 BTC, before quickly recovering. What’s behind the crash is currently unclear, although some suspect it could be related to a whale such as an ICO fund cashing out.

Ethereum price chartSource: CryptoCompare

Flash crashes are notably nothing new in the cryptocurrency space, and Ethereum’s ether is a particularly affected cryptocurrency. This partly because of how the token was distributed and how much wealth some ICOs managed to accumulate.

Back in 2017, the price of ETH flash crashed from around $300 to only $0.10 on Coinbase Pro, at the time known as GDAX, after the trading pair was hit with a “multimillion dollar market sell” order.

At the time the vice president of GDAX Adam White revealed on the exchange’s blog that the multimillion dollar sell order saw a number of orders get filled, from $317 to $224. This saw the price keep on dipping, triggering 800 stop loss orders and margin funding liquidations.

It’s possible something similar happened on Poloniex. The Circle-owned exchange hasn’t yet commented on the flash crash.