BitMEX bitcoin derivatives: Price discovery, informational efficiency, and hedging effectiveness

Abstract

BitMEX is the largest unregulated bitcoin derivatives exchange, listing contracts suitable for leverage trading and hedging. Using minute‐by‐minute data, we examine its price discovery and hedging effectiveness. We find that BitMEX derivatives lead prices on major bitcoin spot exchanges. Bid–ask spreads, interexchange spreads, and relative trading volumes are important determinants of price discovery. Further analysis shows that BitMEX derivatives have positive net spillover effects, are informationally more efficient than bitcoin spot prices, and serve as effective hedges against spot price volatility. Our evidence suggests that regulators prioritize the investigation of the legitimacy of BitMEX and its contracts.

Forecasting bitcoin volatility: Evidence from the options market

“…Despite the fact that the options exchange considered in this study (Deribit) is unregulated, BTC traders are attracted by the investment opportunities provided by the exchange and appear to tolerate the lack of regulation. This finding is consistent with Alexander et al (2020) in the BTC futures market and also in line with the fact that BTC itself is unregulated.…”

What role do futures markets play in Bitcoin pricing? Causality, cointegration and price discovery from a time-varying perspective?

“… 3 A recent study by Alexander, Choi, Park, & Sohn, 2020 documents time-varying price discovery of the cryptocurrency futures. …”

Is It Possible to Forecast the Price of Bitcoin?

“…It is not easy to assess the impact of that cryptocurrency on others. As Alexander et al [117] put it, regulators (need to) prioritize the investigation of the legitimacy of BitMEX and its contracts based on concerns of lack of transparency and potential market manipulation.…”

“…In a seminal paper on BitMEX bitcoin derivatives (off-shore, unregulated) exchanges, Alexander et al [117] recalls the speculative role played by Tether in the trading community as a means of exchanging 1 US$ against 1 USD Tether (USDT, supposedly backed one-to-one in BitMEX). Chief concerns among market players is the possibility of "front-running" by printing large amounts of USD into Bitcoin to provoke a price jump, and then once the market is shocked, revert back the transaction from Bitcoin to USD to effectively cash in your benefit.…”