Price discovery in bitcoin spot and futures markets

Abstract

The growing significance of derivatives within the fragmented bitcoin trading ecosystem has heightened scrutiny regarding the markets that lead bitcoin’s price discovery. This paper delves into the intricate dynamics of bitcoin spot and futures trade activity, employing a robust framework for high-frequency lead-lag analysis utilizing the Hayashi-Yoshida estimator. Our findings reveal that the CME bitcoin futures market plays a leading role in price formation, with transaction size emerging as a critical determinant of market leadership. Furthermore, we provide an in-depth exploration of the unique microstructure of bitcoin markets, highlighting how varying trade sparsity influences price discovery metrics. This comprehensive analysis contributes valuable insights for both market participants and regulators, fostering a deeper understanding of the factors that shape market efficiency.