Bitcoin Metaorder Data Supports Square-Root Market Impact

Summary

This empirical study examines market impact in Bitcoin/USD using a dataset that reconstructs more than one million metaorders. It tests the square-root relationship between impact and order size, finding that the pattern holds across four orders of magnitude despite little statistical arbitrage and market-making activity.

The analysis finds that square-root impact describes the full course of a metaorder, rather than only its final execution price. It also separates order flow into estimated informed and uninformed components; the uninformed component is associated with nearly complete long-term decay in impact. These findings are used to assess predictions from market-impact models and to argue that heterogeneous-agent models may explain the observed dynamics. The evidence concerns one Bitcoin exchange market, and the document does not establish that the same behavior applies universally to other assets or venues.

Key ideas

• The study reconstructs more than one million Bitcoin/USD metaorders to analyze market impact.
• Square-root market impact appears across four orders of magnitude in the data.
• The square-root relationship holds during a metaorder’s trajectory as well as at its final execution price.
• Estimated uninformed order flow is associated with nearly complete long-term impact decay.
• The findings inform comparisons among market-impact models but do not prove universal applicability.

Tags

# A Million Metaorder Analysis of Market Impact on the Bitcoin


# A Million Metaorder Analysis of Market Impact on the Bitcoin









We present a thorough empirical analysis of market impact on the Bitcoin/USD exchange market using a complete dataset that allows us to reconstruct more than one million metaorders. We empirically confirm the "square-root law'' for market impact, which holds on four decades in spite of the quasi-absence of statistical arbitrage and market marking strategies. We show that the square-root impact holds during the whole trajectory of a metaorder and not only for the final execution price. We also attempt to decompose the order flow into an "informed'' and "uninformed'' component, the latter leading to an almost complete long-term decay of impact. This study sheds light on the hypotheses and predictions of several market impact models recently proposed in the literature and promotes heterogeneous agent models as promising candidates to explain price impact on the Bitcoin market -- and, we believe, on other markets as well.

Shown in full with attribution under the source's licence. Licence: abstract CC0

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.