The relationship between Bitcoin returns, volatility and volume: asymmetric GARCH modeling

What is it about?

We explore the relationship between Bitcoin volume, volatility, and returns using EGARCH modelling. We find: Positive and significant relationship between (i) volume and volatility after 2013 (year Bitcoin became popular), and (ii) volume and returns before the Mt. Gox hack. During the euphoric period, starting at the beginning of 2013 until the Mt. Gox hack, unexpected increases in Bitcoin returns increased Bitcoin volatility more than unexpected, equally sized decreases (asymmetry). Therefore, in the Bitcoin market, we would expect that “euphoric buying” when there is a rise in returns would be more prevalent than “panic selling” when returns decrease. One reason for this could be that the main motivation for Bitcoin enthusiasts is ideological; would view “good news” as “confirming” their expectations and the enthusiasm would cause increased volatility, more so than “bad news” would cause – “bad news” would find such users still holding on to their precious Bitcoins.

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