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Price Discovery in Bitcoin exchange

About thirty days ago I shared a chart on Price Discovery in this sub. There was a lot of interest in it and I promised to explain in detail a Bitcoin price discovery algorithm.. I do so in this post.
*this text post is a slightly shorter version of what I wrote in my blog.

TL;DR

I applied price discovery algorithms to 5 Min OHLCV data from Bitmex and CME contracts and Bitstamp, Coinbase, HitBTC, Kraken, Poloniex, Binance, and OkEx BTCUSD/BTCUSDT markets from March 2016 to May 2020. Some exciting results I got was:

Introduction

Price discovery is the overall process of setting the price of an asset. Price discovery algorithms identify the leader exchanges whose traders define the price. Two approaches are most famous for use in Price Discovery. Gonzalo and Granger (1995) and Hasbrouck (1995). But they assume random walk, and a common efficient price. I do not feel comfortable assuming random walk and common efficient price in Bitcoin Markets. So I used this little know method by De Blasis (2019) for this analysis. This work assumes that "the fastest price to reflect new information releases a price signal to the other slower price series." I thought this was valid in our market. It uses Markov Chains to measure Price Discovery. Without going into the mathematical details the summary steps used was:
De Blasis (2019) names this number Price Leadership Share (PLS). High PLS indicates a large role in price discovery. As the sum of the numbers is 1, they can be looked at as a percentage contribution. I recommend reading the original paper if you are interested to know more about the mathematical detail.

Data

Andersen (2000) argues that 5 Minute window provides the best trade-off between getting enough data and avoiding noise. In one of the first work on Bitcoin's Price Discovery, Brandvold et al. 2015 had used 5M window. So I obtained 5M OHLCV data using the following sources:
Futures data are different from other data because multiple futures contract trades at the same time. I formed a single data from the multiple time series by selecting the nearest contract until it was three days from expiration. I used the next contract when the contract was three days from expiration. This approach was advocated by Booth et al ( 1999 )

Analysis

I can't embed the chart on reddit so open this https://warproxxx.github.io/static/price_discovery.html
In the figure above, each colored line shows the total influence the exchange had towards the discovery of Bitcoin Price on that day. Its axis is on the left. The black line shows a moving average of the bitcoin price at the close in Bitfinex for comparison. The chart was created by plotting the EMA of price and dominance with a smoothing factor of 0.1. This was done to eliminate the noise. Let's start looking from the beginning. We start with a slight Bitfinex dominance at the start. When the price starts going up, Bitfinex's influence does too. This was the time large Tether printing was attributed to the rise of price by many individuals. But Bitfinex's influence wanes down as the price starts rising (remember that the chart is an exponential moving average. Its a lagging indicator). Afterward, exchanges like Binance and Bitstamp increase their role, and there isn't any single leader in the run. So although Bitfinex may have been responsible for the initial pump trades on other exchanges were responsible for the later rally.
CME contracts were added to our analysis in February 2018. Initially, they don't have much influence. On a similar work Alexandar and Heck (2019) noted that initially CBOE contracts had more influence. CBOE later delisted Bitcoin futures so I couldn't get that data. Overall, Bitmex and CME contracts have been averaging around 50% of the role in price discovery. To make the dominance clear, look at this chart where I add Bitmex Futures and Perp contract's dominance figure to create a single dominance index. There bitmex leads 936 of the total 1334 days (Bitfinex leads 298 days and coinbase and binance get 64 and 6 days). That is a lot. One possible reason for this might be Bitmex's low trading fee. Bitmex has a very generous -0.025% maker fee and price discovery tend to occur primarily in the market with smaller trading costs (Booth et al, 1999). It may also be because our market is mature. In mature markets, futures lead the price discovery.
Exchange bitmex_futures bitfinex coinbase bitmex okex binance cme bitstamp okcoin kraken poloniex
Days Lead 571 501 102 88 34 12 8 7 6 4 1
 Table 1: Days Lead 
Out of 1334 days in the analysis, Bitmex futures leads the discovery in 571 days or nearly 43% of the duration. Bitfinex leads for 501 days. Bitfinex's high number is due to its extreme dominance in the early days.
Exchange binance huobi cme okcoin bitmex_futures okex hitbtc kraken poloniex bitstamp bitfinex coinbase bitmex
Correlation 0.809190 0.715667 0.648058 0.644432 0.577147 0.444821 0.032649 -0.187348 -0.365175 -0.564073 -0.665008 -0.695115 -0.752103
 Table 2: Correlation between the close price and Exchange's dominance index 
Binance, Huobi, CME, and OkCoin had the most significant correlation with the close price. Bitmex, Coinbase, Bitfinex, and Bitstamp's dominance were negatively correlated. This was very interesting. To know more, I captured a yearwise correlation.
index 2016 2017 2018 2019 2020
0 bitfinex 0.028264 -0.519791 0.829700 -0.242631 0.626386
1 bitmex 0.090758 -0.752297 -0.654742 0.052242 -0.584956
2 bitmex_futures -0.011323 -0.149281 -0.458857 0.660135 0.095305
3 bitstamp 0.316291 -0.373688 0.600240 -0.255408 -0.407608
4 coinbase -0.505492 -0.128336 -0.351794 -0.410874 -0.262036
5 hitbtc 0.024425 0.486229 0.104912 -0.200203 0.308862
6 kraken 0.275797 0.422656 0.294762 -0.064594 -0.192290
7 poloniex 0.177616 -0.087090 0.230987 -0.135046 -0.154726
8 binance NaN 0.865295 0.706725 -0.484130 0.265086
9 okcoin NaN 0.797682 0.463455 -0.010186 -0.160217
10 huobi NaN 0.748489 0.351514 -0.298418 0.434164
11 cme NaN NaN -0.616407 0.694494 -0.012962
12 okex NaN NaN -0.618888 -0.399567 0.432474
Table 3: Yearwise Correlation between the close price and Exchange's dominance index
Price movement is pretty complicated. If one factor, like a dominant exchange, could explain it, everyone would be making money trading. With this disclaimer out of the way, let us try to make some conclusions. This year Bitfinex, Huobi, and OkEx, Tether based exchanges, discovery power have shown a high correlation with the close price. This means that when the traders there become successful, price rises. When the traders there are failing, Bitmex traders dominate and then the price is falling. I found this interesting as I have been seeing the OkEx whale who has been preceding price rises in this sub. I leave the interpretation of other past years to the reader.

Limitations

My analysis does not include market data for other derivative exchanges like Huobi, OkEx, Binance, and Deribit. So, all future market's influence may be going to Bitmex. I did not add their data because they started having an impact recently. A more fair assessment may be to conclude this as the new power of derivative markets instead of attributing it as the power of Bitmex. But Bitmex has dominated futures volume most of the time (until recently). And they brought the concept of perpetual swaps.

Conclusion

There is a lot in this data. If you are making a trading algo think there is some edge here. Someday I will backtest some trading logic based on this data. Then I will have more info and might write more. But, this analysis was enough for to shift my focus from a Bitfinex based trading algorithm to a Bitmex based one. It has been giving me good results.
If you have any good ideas that you want me to write about or discuss further please comment. If there is enough interest in this measurement, I can setup a live interface that provides the live value.
submitted by warproxxx to BitcoinMarkets [link] [comments]

[uncensored-r/BitcoinMarkets] Some questions about taxes, bookkeeping, and GDAX / coinbase records

The following post by throwaway929892988 is being replicated because some comments within the post(but not the post itself) have been silently removed.
The original post can be found(in censored form) at this link:
np.reddit.com/ BitcoinMarkets/comments/7ly39l
The original post's content was as follows:
** I know this is long - if you are able to answer any, or a few, of the questions contained in this post, I would be extremely thankful. Really any comments would be appreciated so I know I'm not alone**
I've read all the threads on this and other subs regarding taxes, and recently bought a 1 yr. subscription to cointracking.info. Unfortunately, I purchased ETH, LTC, and BTC via coinbase for the first few months of my trading, until I found out that GDAX is so much cheaper and easier to use.
So I have records in CSV format from both exchanges, similarly, cointracking.info couldn't seem to reconcile (whether using CSV imports or API data) my various transfers from coinbase to GDAX for my day trade attempts and from GDAX to coinbase after purchasing, and before transfer to a hard wallet. So it interpreted these transfers as "sales."
I've also sent a handful of ETH to binance to put into various alts (which are all currently down). I recently day traded a bit with BTC while it was falling predictably down and increased my holdings by .05 or so. I wasn't thinking, and now realize that this effectively "realized" my gains on part of my BTC that I had been buying since early August. I repeated this process quite a few times, buying and selling the same sum of BTC.
  • However, what I don't understand is how one is supposed to "pair" or decide which portion of BTC they realize when they sell. Because I bought BTC all the way up from around 3 K and if I technically realized the gains from some BTC I bought at 9 or 9.5 K during my trading / realizing, then the tax I owe would be a lot less than the sale of BTC bought below 5, etc. Is this discretionary - I know there's means to I.D. specific coins, but when I sold it was certainly a varied mixture of *hundreds of different small purchases.
  • I'm also having problem even using the GDAX CSV of sale records, because of some recent day trading, my technical cost includes duplicated "re-buys" of day traded coins, so it thinks I spent like 7 times what I really did, when in reality I was buying / selling the same bundle of coin / coin fractions.
  • With my limited understanding of taxes (recent college grad with no job yet) I'm hoping that for some of the day trading, it will at least only be the first (of a handful of buys and sells with the same coins) that are realized to cause any substantial tax costs, as once I sell and re-buy once, my basis is now much higher, and given that I was selling and buying in the same general price range of BTC (and other coins) the spread / difference would be comparably minimal, so it's not like it takes the same 25% or whatever percent each time I make a trade, right?
  • Lastly, does anyone know how capital gains from conventional stock portfolios affect your tax bracket? I may have read that some people qualify for 0% tax on long term gains if they have no job, and meet a few other variables. I currently have no earned income, but do have a relatively large stock portfolio which I oversee with a family member, the markets done well this year, but to my knowledge none of this large and varied volume of stocks are ever sold / realized, they are just being "hodled" for lack of a better word, as many do in traditional investing.
  • Having acted out of greed / opportunity and naivete (thinking I was helping myself + making money by buying before a dip and buying back, I will never day trade again. I only hope that these taxable events do not eat up a huge fraction of my gains, which I have worked hard to accumulate while working diligently to learn the ropes of crypto buying and research. I'm not asking for sympathy, as I have it better than many, but I do seek information and want to have some general questions answered before I go back with a giant excel file to bring to my family friend, so I can ensure the information is accurate, etc.
I luckily have a family friend who helps do my parents taxes in exchange for dinners and out of generosity. I approached him with questions about how to "track" my gains off of ETH into binance alt coins, as the price of ETH shifts constantly, and we ended up talking taxes. He asked me to chart every transaction - volume, price, date, fee, coin, etc. in excel - I had been doing this fairly well for months, and think that combining the coinbase and GDAX CSV files for each 3 coins might work, but it's so much data I'm very stressed - and equally pissed if my day trading stupidity (which earned me 500 dollars) ends up costing me 3 K in taxes.
I know this was a lot of varied questions, and I'm happy to re-format in more palatable bullet points, but if anyone is willing to answer any of the above confusions I would be very thankful and would find a way to give thanks
Thanks for your time - a concerned / born again hodler
submitted by censorship_notifier to noncensored_bitcoin [link] [comments]

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