Trading Volume in Cryptocurrency Markets

Abstract

We study the value of trading volume in cryptocurrency markets and contribute to a growing literature that aims to understand the role of cryptocurrencies as investment. The main results show that the interaction between lagged volume and past returns have a significant predicting power for future returns. Such predictive power is economically significant; an investment strategy that conditions on past returns and volume generates a substantial Sharpe ratio with zero correlation with Bitcoin and Ethereum dollar returns. These results are consistent with existing theoretical models that postulate that is primarily "speculation" on private information that generates the observed returns dynamics.