1/
Bitcoin prices are strongly shaped by who is aggressively buying and selling. 60% of the variation in its daily returns, can be explained by its signed order flow
2/
Unlike bitcoin, stocks usually have more anchors on price formation besides immediate trade imbalances. Order flow still moves prices, but it explains less of the total variance than in BTC... much less in fact. Stocks are more... complicated lets say
3/
Bitcoin more so resembles a currency in this sense, than it does a stock. FX pairs achieve r-squareds' in excess of 50%, indicating they are also heavily flow-driven.
nber.org/system/files/w
4/
This paper is what inspired me to carry out this analysis (rather replicate it)... back in the day, signed flow used to explain 85% of bitcoins variability!
doi.org/10.1016/j.jfin
Note:
I only show binance futures data (as opposed to all 7 spot exchanges used in the paper), simply because its explanatory power dwarfs all the other exchanges. Futures trading still dominates price discovery in bitcoin
5/
So clearly, orderflow's explanatory power has declined in recent years... but its still massive! 60% is the sample wide mean, but on shorter time frames, orderflow can still explain as much as 80% (and as little as 40%) of bitcoin moves.
6/
"Because Bitcoin is heavily flow-driven, it has a strong tendency to exhibit reflexive, regime-like behavior. Long stretches of inertia can give way to violent directional moves, and both the quiet and explosive phases can become self-reinforcing. This is partly because signed order flow tends to be persistent and heavy tailed: buying often attracts more buying, while selling can trigger further selling through stops, liquidations, dealer repricing, and thinning liquidity.
As a result, Bitcoin often does not trend in the smooth, continuous way many traditional assets do. It tends instead to move through bursts, pauses, and cascades — periods of compression followed by rapid expansion, with price discovery dominated less by slow-moving fundamentals than by the interaction between aggressive flow, positioning, and market depth." Thanks ChatGPT, for all that you do
Lev
@LeafiestParapet
Discipline is knowing when to fold. Patience is waiting for the right hand. Resilience is making the right play, even when the river doesn’t bring your heart.
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