Order Flow and the Bitcoin Spot Rate

Abstract

Bitcoin is a decentralized, open-source cryptocurrency used to make private, peer-to-peer transactions anywhere across the world. Although the individuals involved are (mostly) anonymous, every Bitcoin transaction is a matter of public record; anyone can view every Bitcoin transaction ever made. Following the methodology developed by Evans and Lyons (2002), this paper adapts and estimates a FX microstructure model that emphases order flow, the difference between buyer- and seller-initiated trading volume, to the Bitcoin market Using a data set consisting of all major currency transactions occurring on the Mt. Gox exchange, our results are quite similar to prior microfinance research on traditional currencies insofar order flow is a significant determinant of Bitcoin spot rates.