Investigating the Market Reaction to Large Transactions on the Bitcoin Blockchain
This blog post is based on the BRL Working Paper “Market Reaction to Large Transfers on the Bitcoin Blockchain – Do Size and Motive Matter?” by our researchers Lennart Ante and Dr. Ingo Fiedler. Read the full paper here.
A specific feature of the blockchain technology and thus also of the Bitcoin network is the underlying transparency. Each network participant can observe in virtually real time how many and what kind of transactions take place in the Bitcoin network. So, if someone sends out a big amount of Bitcoin, the market recognizes this immediately.
We were interested in the question to what extent this information is recognized as relevant by the market and whether corresponding effects can be observed on secondary markets. If someone transfers Bitcoins worth millions of Euros, this can be intuitively interpreted as a sign of uncertainty. Possibly nothing happens and the Bitcoins lie ‚unused‘ on a new address. However, it is also possible that these Bitcoins are to be sold or have been stolen. Against this background, one can assume that this uncertainty will lead to a short-term negative price effect.
For the purpose of analysis, we identified 2,132 Bitcoin transactions between October 2018 and September 2019 in which at least 500 Bitcoins were transferred. The following graph shows the average price development of the Bitcoin price for 140 minutes before to 20 minutes after the large transactions on the blockchain. We apply event study methodology, a method where the average returns of the past are compared to returns around an event window. If returns in the event window are higher than historic returns, one speaks of abnormal returns, i.e. returns that can be explained by the event.