Underreaction and overreaction in Bitcoin market

ABSTRACT

Bitcoin market had a significant momentum phenomenon before the launch of Futures, and then it turned into an insignificant reversal effect. After Covid-19 appeared, the momentum effect and reversal effect disappeared. The advent of bitcoin futures has increased how investors respond to information. With the outbreak of COVID-19, investor interest in Bitcoin as a safe-haven asset has increased the effectiveness of the price. We estimate the speed of signal diffusion in the bitcoin market, and the results support that effective response to information is the essential mechanism for the disappearance of momentum effect.

KEYWORDS:

• Momentum effect
• overreaction
• underreaction
• Bitcoin Market
• Bitcoin Futures

JEL CLASSIFICATIONS:

• JEL: G01
• G14

Acknowledgments

The authors acknowledge the financial support from the Key Laboratory of Mathematical Economics and Quantitative Finance (Peking University), Ministry of Education of China.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Highlights

● Bitcoin futures and COVID-19 change the momentum effect in the Bitcoin market.

● The gradual maturity of the Bitcoin market has increased the effectiveness of the Bitcoin price and reduced the momentum in the market.

● The empirical test of overreaction and underreaction supports that efficient response to information is an essential mechanism for disappearing momentum.

Notes

¹ e. g. Bariviera (2017); Cong et al. (2021)

² e. g. Grobys and Sapkota (2019); Schilling and Uhlig (2019).

³ e. g. Asness, Moskowitz, and Pedersen (2013)

⁴ Feng, Wang, and Zhang (2018) found that cryptocurrencies, including Bitcoin, became both lower tail independent and cross tail independent with four selected stock indices and two commodities of gold and crude oil, which implies part of the safe-haven function. Cryptocurrencies can be a great diversifier for the stock market as a gold commodity.

⁵ Bitstamp was established in 2011 and is one of the oldest cryptocurrency trading platforms.

Additional information

Funding

This work was supported by the Key Laboratory of Mathematical Economics and Quantitative Finance