The Role of Binance in Bitcoin Volatility Transmission

TL;DR

This paper investigates how Binance's tether-margined derivatives influence Bitcoin's volatility, revealing Binance as a key source of volatility transmission, especially during US trading hours and Western stock market hours.

Contribution

It provides new insights into the role of Binance's tether-margined derivatives in Bitcoin volatility spillovers and market interconnectedness.

Findings

Binance's tether-margined perpetual contract is the main source of volatility.

Higher market interconnectedness occurs during US and Western stock market hours.

Binance derivatives significantly influence Bitcoin volatility dynamics.

Abstract

We analyse high-frequency realised volatility dynamics and spillovers in the bitcoin market, focusing on two pairs: bitcoin against the US dollar (the main fiat-crypto pair) and trading bitcoin against tether (the main crypto-crypto pair). We find that the tether-margined perpetual contract on Binance is clearly the main source of volatility, continuously transmitting strong flows to all other instruments and receiving only a little volatility. Moreover, we find that (i) during US trading hours, traders pay more attention and are more reactive to prevailing market conditions when updating their expectations and (ii) the crypto market exhibits a higher interconnectedness when traditional Western stock markets are open. Our results highlight that regulators should not only consider spot exchanges offering bitcoin-fiat trading but also the tether-margined derivatives products available on most unregulated exchanges, most importantly Binance.