BSc Economics and Finance

L1094: Applied Finance Project

Spring 2021

Examining the Speculative Activity on bitcoin

Perpetual Futures Across Exchanges

Abstract

This study examines the bidirectional Granger causal relationship between speculation and
returns volatility, as well as speculation and basis volatility on bitcoin perpetual futures
contracts. Empirical analysis was conducted across eleven centralised derivatives exchanges.
The results identify on which exchanges these relationships are the most statistically
significant. Bidirectional evidence is found in both pairwise tests, although the evidence for
basis volatility and speculation is found on fewer exchanges.

Candidate Number: 198209

Word count excluding tables, figures and references: 4094

Statement of Authenticity
I certify that this project is all my own work
 Table of Contents

I. Introduction………………………………………………………………………………………………………….2
II. Literature Review………………………………………………………………………………………………….4
III. Data Analysis and Intuition Behind Methodology………………………………………………….6
A. Returns Volatility……………………………………………………………………………………….7
B. Basis Volatility……………………………………………………………………………………………8
C. Turnover Ratio………………………………………………………………………………….……….9
D. Graphical Illustrations…………………………………………………………………..…………10
IV. Methodology………………………………………………………………………………………………………14
V. Empirical Analysis……………………………………………………………………………………………….17
VI. Empirical Robustness………………………………………………………………………………………….19
VII. Conclusion…………………………………………………………………………………………………………..21
VIII. References………………………………………………………………………………………………………….22
IX. Appendix…………………………………………………………………………………………………………….23

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 I. Introduction
There is a distinct difference between using derivatives to speculate for profit and hedging for
risk management. This study examines speculative activity on USD/XBT perpetual futures
across 11 centralised derivatives exchanges. With the crypto derivative space growing and
innovating at its current rate, it is important to understand the bidirectional dynamics of
speculation, returns and basis. This study examines the Granger causal relationship between
speculation and returns volatility and speculation and basis volatility (Granger, 1969).

Speculators are attracted to the small arbitrage opportunities across space, where prices of
perpetual futures contracts differ across exchanges. If the fees associated with these trades
are less than the potential to make an arbitrage profit, speculators are attracted and trading
volume increases. Speculators are also attracted due to the price differences between an
individual exchange’s perpetual futures price and spot price, known as the basis. Arbitrage
opportunities are short lived since speculators notice these and trade the prices back to no
arbitrage levels. The use of daily data in this study is therefore has its limitations. On a daily
level, arbitrage opportunities are less clear than they would be in higher frequency data.

The competition and market share in the centralised derivatives exchange space changes
quickly due to the pressure of new entrants and the need to innovate. As the crypto space in
general likely becomes more widely adopted as a result of its innovation, the exchanges will
face stricter regulatory pressures. Attention from regulators is already prominent, for example
the CFTC filed charges against BitMEX in 2020 (CFTC, 2021).

While Coinbase is not a derivatives exchange, it went public in April 2021 and faced robust
regulation. If any of the significantly less regulated derivatives exchanges mentioned in this
study plan on going public in the future, they will also face strict regulation. This study is
important for regulators to understand, as we compare across exchanges the relative
significance of the speculation, returns volatility and basis volatility Granger causal
relationship. This is useful because it allows an assessment of which exchanges returns and
basis volatility are, in this Granger sense, more sensitive to speculation, and vice versa. This
indicates where regulation would have the biggest impact across exchanges.

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(Lucia and Pardo, 2010) note the distinction of speculation and hedging is captured by the
holding period. The average holding period (AHP) is calculated through equation (1). A lower
relative AHP indicates more relative speculation.1 Trading volume is divided by two in order to
account for the recording of opening and closing a contract. Figure 1 visualises the mechanism
of AHP conceptually, where any given !! represents a contract. Day one of the contract
represents its purchase and day four of the contact represents its sale. At the beginning of
trading day four, the open interest is 15 contracts outstanding, and the trading volume is 10,
thus the AHP is 3.

!"#$ &$'#(#)' (!&)

Average Holding Period = ! (1)
,(-./$0 12345# (1)
"

Figure 1 - Illustration of Average Holding Period

The AHP of some of the more traditional and early movers on crypto derivatives exchanges are
summarised in Table 1. These data were obtained from Coinalyse, providing a preliminary view
of the most speculative exchanges.2

1 AHP was suggested by Professor Carol Alexander, University of Sussex.

2 Coinalyze.net. 2021. https://coinalyze.net/bitcoin/open-interest/. Full empirical tests were run on a different dataset. This
table has been included because there were issues with the empirical data for Huobi and Bitforex.

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 Table 1 - Average Holding Period
over 15-Aug-2020 to 03-Feb-2021.
Exchange AHP
Binance 0.049
BitMEX 0.126
OKEx 0.107
Bybit 0.110
Huobi 0.054

Binance has the smallest AHP which is 0.049 of a day, Huobi also has a small AHP of 0.54 relative
to BitMex, Okex and Bybit’s higher AHPs. This shows there is more speculative or manipulative
activity on Binance and Huobi since they have a lower AHP. This study later looks across a wider
range of exchanges using a different speculation proxy proposed by (García et al. 1986).

II. Literature Review

(Robles, Torero and Von Braun, 2009) provide the empirical framework for this study, namely
Granger causality tests. The authors tested whether previous values of speculation indices can
help predict current values of commodity prices. Where this relationship was found to be
statistically significant, it can be said that speculation Granger causes commodity prices.

(Robles, Torero and Von Braun, 2009) use CFTC data which reports traders as commercial with
the aim of hedging or non-commercial, who typically are day traders who speculate. The paper
provides evidence to suggest the food crisis of 2007-08 might have been exacerbated by the
malfunctioning of world grain prices driven by speculation. This study seeks to examine if a
similar relationship can be found with speculation and returns volatility on our dataset. We use
returns volatility since our speculation proxy includes long and short trading. The authors note
their evidence is not robustly conclusive and they do not provide statistical proof of their
empirical findings directly, which is a limitation of their study.

The authors note, in principle, “excessive speculation” in futures markets can drive up futures
prices which, through arbitrage opportunities, increase spot prices greater than justified levels
set by demand and supply. This theory links to our research as we examine basis and
speculation. The authors stipulate this harmful magnitude of futures leading spot above
justified levels resulted in overregulation and trader policing in a number of regions. This meant
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some commodity futures exchanges had to pause grain trading. If speculative price spikes
affect the difference between futures and spot prices to a high magnitude in our dataset,
overregulation could also occur in the crypto derivative space. It’s important to note this
overregulation was imposed due to the ethical implications of overspeculation on commodity
prices, as these affect food prices for individuals in the global economy, especially
disproportionately in ‘poorer’ countries.

(Lucia and Pardo, 2010) critically evaluate the literature on speculation ratios in futures
markets using volume and open interest data. The authors test whether different ratios
provide the same conclusions on speculative and hedging demand over time, using the
spearman cross correlation methodology. A limitation of their analysis is that a comparative
conclusion was not found, although they outlined the scenarios in which one would use each
ratio and its drawbacks. The authors also suggest an alternative ratio which overcomes several
limitations. The paper outlines the dangers in using the ratios to look at the evolution of
speculative demand towards the very end of the futures contract. The cancellation of contracts
are mistakenly classified as new long positions. Perpetual futures do not have an expiry, thus
can be used without danger of misclassifying. We use the turnover ratio discussed in (Lucia
and Pardo, 2010), which is illustrated in equation (2). This speculative proxy was first
introduced by (García et al. 1986).

12345# (1)
Turnover Ratio (566 ) = !"#$ &$'#(#)' (!&) (2)

(Wellenreuther and Voelzke, 2018) examine the bidirectional Granger causal relationship
between speculation and price volatility; the authors use a more complex volatility than in this
study. They found weak evidence to suggest speculation Granger causes price but found robust
evidence to suggest volatility Granger causes speculation. It makes intuitive sense that the
latter relationship is more statistically significant as high volatility alludes to higher risk in the
market, and higher rewards which attracts speculators.

(Chan, Nguyen and Chan, 2015) found the prior day’s basis has a significant positive effect on
current day speculation in the oil futures market during their pre-financialisaton period. They
find this effect to be reversed in their post financialisaton period. The findings contribute to

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the literature as it is important for hedgers in the oil market to understand the relationship
between basis and speculation, since hedgers face basis risk, which is defined as variability in
the basis. If basis risk increases following excessive trades “executed by noise traders, the risk
management and price discovery function of the futures market are greatly reduced”. We will
follow up on this interesting finding by examining the Granger causal relationship between
speculation and basis volatility, which could have similar regulatory implications in the crypto
derivative space.

(Chan, Nguyen and Chan, 2015) note the futures markets provide price discovery for spot
markets. When the market is efficient, futures prices are an unbiased estimate of the spot
prices. Any abnormality or decoupling of perfect correlation between futures and spot prices
provides arbitrage opportunities which attract speculators to profit from this decoupling. This
speculative trading pushes the futures and spot prices to converge again, thus speculators help
markets become more efficient. The authors note speculators can be more inclined to
speculate on the basis variability rather than the futures price variability. We follow up this
theory by examining the Granger causal relationship between speculation and both the
volatility of perpetual futures returns and basis volatility. There is a gap in the literature
regarding these speculation relationships on centralised crypto derivatives exchanges.

III. Data analysis and Intuition Behind Methodology

The dataset was obtained through IntoTheBlock.3 We gathered the daily closing price of
USD/XBT perpetual futures, 24hr volume, closing open interest, basis and funding rate data
across several exchanges from 09-Feb-2020 to 18-Apr-2021.4 The sample of exchanges was
reduced to 11 after looking at optimal length and starting dates.5 A perpetual futures contract
has no expiration date; therefore, the perpetual futures price is pegged to the underlying asset
through the funding rate.

3 https://app.intotheblock.com/
4 The funding rate could not be used as it should change more frequently than was illustrated in the dataset.
5 We identified Huobi and Bitforex to have illogically inflated figures when we computed the turnover ratio. This has been

reported to IntoTheBlock where they are checking their data collection on these exchanges. These exchanges could be
added to the empirical analysis in any updates to this study, assuming the data has been corrected.
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The perpetual futures closing price for each exchange, ""# , was used to calculate the absolute
value of log returns for each exchange, |$"# |, which is our variable for returns volatility. The
volume and open interest data were used to compute our speculation proxy, the turnover
ratio, %&# , as denoted in equation 2. The basis volatility, |B$% |, as denoted in equation 3, was
computed by taking the absolute value of the basis.

74'4(#) 8(/9#:;"2' 8(/9#

|B'# | = : : (3)
;"2' 8(/9#

A. Returns Volatility
We use |$"# | to examine if a positive spike in perpetual futures returns volatility is associated
with a positive spike in speculation. The %&# doesn’t contain information on whether there is
long or short speculation, thus using non-absolute returns in empirical analysis would lead to
spurious regression results. This is because we would misclassify a directional relationship,
when only a volatility relationship can only be observed.

Table 3 illustrates the summary statistics for returns volatility.6 The differences across mean
and standard deviation highlight the small arbitrage opportunities and risk across exchanges.
The mean is highest on BitMEX and lowest on Binance. The standard deviation across
exchanges is very low, at most 0.0025767 for FTX, meaning the absolute returns do not deviate
much from their average return. The annualised volatility is computed by multiplying the
standard deviation by the square root of 365; these are again all very closely related across
exchanges. Similarly, FTX has the largest annualised volatility, meaning there is marginally more
risk amongst absolute returns on this exchange. The series do not follow a perfect normal
distribution as they are positively skewed, the upper tail is the heaviest meaning the series
jump up more than they jump down. The series are leptokurtic due to their high kurtosis and
heavy tails meaning outliers are significant; this feature is the strongest on Bybit. A limitation
of this dataset is its frequency, on a daily level it is shown that we cannot not see distinct
differences in summary statistics; we expect these differences would be clearer in higher
frequency data.

6 The decimal places for mean, standard deviation and annualised volatility are kept at 7 to allow for comparison.

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 Table 3 - Summary Statistics for Returns Volatility |;<6 |
Exchange Mean St. dev Annualised Skewness Kurtosis
Volatility
Bybit 0.0025638 0.0025508 0.0487329 1.943 7.846
Binance 0.0025108 0.0025511 0.0487386 1.922 7.593
FTX 0.0025571 0.0025767 0.0492277 1.916 7.552
BitMEX 0.0025650 0.0025608 0.0489240 1.913 7.633
BTSE 0.0025642 0.0025343 0.0484177 1.880 7.440
Deribit 0.0025560 0.0025439 0.0486011 1.922 7.662
Bitfinex 0.0025111 0.0025276 0.0482897 1.920 7.562
OKEx 0.0025490 0.0025475 0.0486699 1.889 7.425
Kraken 0.0025415 0.0025387 0.0485017 1.909 7.523
BaseFEX 0.0025262 0.0025492 0.0487023 1.919 7.452
Gate.io 0.0025386 0.0025721 0.0491399 1.877 7.337

B. Basis volatility
Perpetual futures lead spot prices at the millisecond level, but not daily, which is a limitation
of our data. At the daily level, the perpetual futures and spot prices are very highly, but not
perfectly correlated. If they were perfectly correlated the basis would be stable. Fluctuations
in the basis are associated with a decoupling of the correlation. When there is a large price
return, the decoupling is likely to be greater, but this could react positively or negatively in the
basis, depending on whether the perpetual futures return has a greater or lesser magnitude
than the spot return. Depending on if the basis is positive or negative, speculators can open
long or short positions to profit from this decoupling, since they know the futures and spot
prices will converge again due to the funding rate. Again, since our %&# doesn’t contain long
or short information, we need to use |B$% | in our empirical analysis. By taking the absolute basis,
we aim to isolate the volatility effect of the futures and spot prices decoupling in correlation.
We expect a positive spike in basis volatility to be associated with a positive spike in speculation
bidirectionally.

Table 4 reports the summary statistics for |B$% |. The differences in summary statistics for |B$% |
are more apparent across exchanges than with |$"# |. The mean indicates Binance, BaseFEX and
Gate.io have the largest average decoupling of correlation between perpetual futures and spot
prices. There is more risk as measured by the standard deviation across basis volatility for
Binance, BTSE, BaseFEX and Gate.io. All exchanges |B$% | have a high kurtosis thus are heavy
tailed indicating significant outliers, this is particularly true for BitMEX and BTSE with a kurtosis

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of 126.586 and 115.346 respectively. All exchanges have a positive skewness and jump up
more than they jump down, this is more significant on some exchanges, the highest being
BitMEX with a 9.046 positive skew.

Table 4 - Summary Statistics for Basis Volatility |B'# |

Exchange Mean St. dev Variance Skewness Kurtosis
Bybit 0.000598 0.000557 3.10e-07 3.987 34.610
Binance 0.001420 0.001406 1.98e-06 3.699 25.996
FTX 0.000666 0.000633 4.00e-07 1.724 6.844
BitMEX 0.000585 0.000746 5.56e-07 9.046 126.586
BTSE 0.000828 0.001038 1.08e-06 8.309 115.346
Deribit 0.000522 0.000469 2.20e-07 1.704 7.008
Bitfinex 0.000749 0.000954 9.10e-07 6.536 75.188
OKEx 0.000633 0.000893 7.98e-07 4.946 41.440
Kraken 0.000190 0.000231 5.32e-08 3.012 16.751
BaseFEX 0.001141 0.001494 2.23e-06 3.788 26.307
Gate.io 0.001249 0.001522 2.32e-06 3.579 21.421

C. Turnover Ratio
The %&# is a short-term speculation proxy as it quantifies the short-term trading or speculation
over the longer term or hedging positions, the higher the %&# the more relative speculation
can be observed. During periods of high price volatility, the turnover ratio increases since
speculators look to capture profit. High volatility also indicates a higher number of contracts
become liquidated which decreases open interest and further increases the turnover ratio.

Table 5 reports the summary statistics for %&# . The mean turnover ratios for Bitfinex and
BaseFEX are 0.098 and 1.614. These are the smallest, which signifies a lower amount of
speculative activity relative to more speculative exchanges such as OKEx, Binance and Gate.io.
The kurtosis on Bitfinex is 15.946 which is the highest. Bitfinex has the highest number of
outliers, meaning its turnover ratio jumps up and down a lot, although this can be seen on all
exchanges. The data are positively skewed meaning the %&# jumps up more than it jumps
down; this relationship is the highest on Bitfinex again.

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 Table 5 - Summary Statistics for the Turnover Ratio 566
Exchange Mean St. d Variance Skewness Kurtosis
Bybit 3.100 2.727 7.438 2.112 9.478
Binance 8.540 5.170 26.727 1.958 8.859
FTX 2.785 1.831 3.353 2.016 9.477
BitMEX 3.673 2.268 5.144 1.849 7.835
BTSE 3.030 3.325 11.055 2.231 8.487
Deribit 2.300 1.523 2.320 1.975 8.341
Bitfinex 0.098 0.082 0.007 2.869 15.946
OKEx 6.607 4.596 21.122 2.045 9.717
Kraken 2.288 1.673 2.797 2.003 10.039
BaseFEX 1.614 0.606 0.367 1.776 7.518
Gate.io 5.389 4.205 17.683 2.119 9.068

D. Graphical Illustrations

Figures 2.1-4.2 illustrate the dataset graphically, due to the dominating effects of 12-March-
2020, black Thursday, we reduce the empirical dataset to 01-April-2020 to 18-April-2021.7
Figures 2.1 and 2.2 show how closely |$"# | across exchanges move together, there appears to
be larger and more frequent positive spikes in the beginning and end of the period.8 Figures
3.1 and 3.2 show there is more variation in |B$% | across exchanges than with |$"# | , the outliers
and positive jumps described in Table 4 can be seen graphically. |B$% | also has more positive
variation at the beginning and end of the sample period. These increases in the end of the
period could be due to the persistent bitcoin rallies, which would have attracted volume,
higher returns and higher basis volatility. Figures 4.1 and 4.2 plot %&# , we can see how
speculation varies across exchanges, with a similar pattern as described from Table 5. A calmer
pattern in the middle of the sample and more variability towards either end can be observed.
This is a graphical indication all three series positively move together. Graphically, Binance has
the highest turnover ratio across the period, BTSE, OKEx and Gate.io also have high levels and
high variability. Bitfinex and BaseFEX likewise with Table 5 have the lowest turnover ratio
across the series. Figures 2.2 and 4.2 show how speculation and returns volatility positively
move together. Figures 2.2 and 3.2 illustrate speculation and basis volatility to also positively
move together, although this relationship graphically seems less obvious. The large spike in
BTSE basis volatility on 25-Nov-2020 is accompanied by a spike in BTSE speculation.

7 The previous summary statistics were also calculated on the sample 01-April-2020 to 18-April-2021.
8 The small arbitrage opportunities across exchanges are clearer in Table 3.

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 IV. Methodology
Before running empirical analysis, we ensure our variables are stationary, such that they have
a constant mean and variance. Running empirical analysis on non-stationary variables can lead
to spurious results. To check the order of integration we use the Augmented Dicky-Fuller (ADF)
test for Unit Root with two lags, illustrated in equation 4 (Dickey and Fuller, 1979).

∆"! = $ + &" "!#" + &$ "!#$ + '! (4)

The null hypothesis is !! = 1 meaning the variable is non-stationary and integrated of order
one, I(1), with a unit root. The alternative hypothesis is !! < 1, the variable is integrated of
order zero, I(0), and has no unit root, meaning the variable can be deemed stationary.

We reject the null hypothesis in favour of the alternative hypothesis when the ADF test statistic
is more negative than the tabulated critical value. The ADF test statistics are illustrated in Table
6. We included a trend in equation 4 only for %"# , because a significant upward trend was
present. %"# is I(1) and non-stationary, we use the absolute log return on price and obtain a
stationary variable |'"# | at a 1% significance level. ()# and |*# | are stationary at the 1%
significance level. The BaseFEX ()# is stationary at a 10% significance level. For robustness we
run the ADF tests without a constant (see Appendix I). The BaseFEX ()# is non-stationary
under the no-constant specification, however we treat it as stationary for empirical analysis;
differencing this variable will create too much variability.

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 Table 6 - ADF Test for Unit Root with Constant - Test Statistics
Exchange (!& |*!& | +,& |-& |
Bybit -1.498 -10.205*** -6.181*** -8.889***
Binance -1.498 -10.197*** -5.945*** -7.849***
FTX -1.495 -10.458*** -5.891*** -7.409 ***
BitMEX -1.483 -10.288*** -6.070*** -10.078***
BTSE -1.515 -10.301*** -3.682*** -7.694***
Deribit -1.482 -10.245*** -6.877*** -8.184***
Bitfinex -1.514 -10.117*** -9.204*** -12.053***
OKEx -1.509 -10.273*** -5.508*** -8.271***
Kraken -1.523 -10.279*** -5.672*** -9.625***
BaseFEX -1.507 -10.262*** -2.631* -6.670***
Gate.io -1.494 -10.181*** -5.144*** -6.463***
Critical values 1%*** 5%** 10%*
-3.450 -2.875 -2.570

We run pairwise Granger causality tests to quantify the bidirectional causal relationship
between speculation, returns volatility and basis volatility.9 Since speculative activity linked to
arbitrage is so short lived and we are using daily data, we use a maximum of two lags for our
tests.10

To test if lagged speculation, which we define as Y, Granger causes current returns volatility or
separately basis volatility, which we define as X, we run pairwise regressions of the unrestricted
model, equation 5, and the restricted model, equation 6.11

|"! | = .",( + ."," |"!#" | + .",$ |"!#$ | + &"," /!#" + &",$ /!#$ + '"! (5)

|"! | = .",( + ."," |"!#" | + .",$ |"!#$ | + '"! (6)

We test bidirectionally and adapt equations 5 and 6. Therefore, we test if lagged basis volatility
or separately lagged returns volatility, which we define as X, Granger causes current

9 Pairwise means we run the regression for basis volatility and speculation and returns volatility and speculation separately,
swapping the X variable. A multiple regression could be estimated, but we want to isolate the Granger causal effect between
two variables individually.
10 There are tests for optimal number of lags based on information criterion, although it doesn’t make intuitive sense to use

more than two lags because what we are testing for in our data moves so quickly.
11 The first integer in the subscript i.e. (1,0) denotes this is the first regression of the bidirectional regressions, where (2,0)

denotes this is the second regression.

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speculation, which we define as Y. We run pairwise regressions of the unrestricted model,
equation 7, and the restricted model, equation 8.

/! = .$,( + .$," /!#" + .$,$ /!#$ + &$," |"!#" | + &$,$ |"!#$ | + '$! (7)

/! = .$,( + .$," /!#" + .$,$ /!#$ + '$! (8)

We then obtain the likelihood ratio statistic for hypothesis testing which takes the likelihood
in the restricted model divided by the likelihood in the unrestricted model. The null hypothesis
for equations 5 and 6 is lagged variables of speculation do not Granger cause current values of
the returns volatility or basis volatility. The alternative hypothesis is that lagged speculation
Granger causes returns volatility and basis volatility.

The null hypothesis for equations 7 and 8 is lagged returns volatility or lagged basis volatility
do not Granger cause current speculation. The alternative hypothesis is lagged returns
volatility or lagged basis volatility does Granger cause speculation. A given null hypothesis is
rejected in favour of its alternative hypothesis when the +ℎ- $ likelihood ratio test statistic is
greater than the +ℎ- $ critical value, thus there is a positive difference between the two. The
greater this difference, the more statistically significant the evidence of Granger causality.

V. Empirical Analysis
The first bidirectional Granger causality test we run is between returns volatility and
speculation; results are illustrated in Table 8. The speculation effect means increases in lagged
speculation Granger cause current increases in returns volatility. The Returns volatility effect
refers to increases in lagged returns volatility having a Granger causal effect on current
increases in speculation. On average across exchanges we find greater statistical evidence for
the returns volatility effect than the speculation effect, although the speculation effect is highly
significant across exchanges. This returns volatility effect is well evidenced in the literature, the
speculation effect is less so, which makes this an interesting finding as the speculation effect
is highly significant in our dataset.

The returns volatility effect is the most statistically significant on Deribit followed by, in order
of highest significance, FTX, OKEx, BitMEX, Binance, Kraken, Bybit and BaseFEX at a 1%
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significance level, Gate.io is significant at a 5% level. BTSE and Bitfinex do not have statistical
significance. Given this relationship is very positive on all other exchanges we expect this to be
an issue with the data. If speculators are attracted by previous increases in returns volatility on
one exchange and all exchanges facilitate the same activity, it should be the case, theoretically
speaking, that there is statistical significance in the case of BTSE. The BTSE mean ()# is 3 which
isn’t dissimilar from other exchanges, although for Bitfinex it is 0.098. Bitfinex has a lower
amount of average speculative activity compared with other exchanges, which could justify the
insignificant results. Due to the differences in speculative indices the results differ.

The speculation effect has the highest significance on OKEx, followed by in order of greatest
significance, BitMEX, Bybit, Kraken, Deribit, FTX, Binance at a 1% significance level, BaseFEX is
significant at a 5% level. Increases in speculation drive increases in returns volatility on the
aforementioned exchanges. This finding could be a potential harm in the functioning of the
bitcoin perpetual futures market, because it can be said speculators Granger cause returns
instability, which can be harmful for those looking to hedge positions. This could be important
for regulators to note on which exchanges speculators have the biggest impacts. We find no
causal effects for BTSE, Bitfinex and Gate.io.

Table 8 - Granger Causality Test Results- Turnover Ratio and Returns Volatility (2 lags)
Returns volatility GC Turnover ratio GC returns
turnover ratio volatility.
Exchange (Returns volatility effect) (Speculation effect)
Bybit 13.4*** 12.942***
Binance 15.531*** 9.5804***
FTX 19.200*** 10.322***
BitMEX 16.026*** 16.083***
BTSE 3.2851 2.956
Deribit 21.149*** 10.708***
Bitfinex 2.9716 1.1912
OKEx 16.655*** 17.059***
Kraken 15.204*** 11.469***
BaseFEX 11.954*** 6.0176 **
Gate.io 8.6786** 3.8547
Critical Values
1%*** 5%** 10%*
9.210 5.991 4.605

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We run the regressions again swapping X for basis volatility and obtain results in Table 9. We
find only some exchanges to have highly significant results under a two-lag model specification.
We expect if results are significant on one exchange, it is likely the same activity occurs on all
exchanges, suggesting the model has been misclassified. (Chan, Nguyen and Chan, 2015) find
significant results using one lag; we explore the possibility that we have included too many lags
(see VI. Empirical Robustness).

Table 9 - Granger Causality Test Results- Turnover Ratio and Basis volatility (2 lags)
Basis volatility GC Turnover ratio GC Basis
turnover ratio volatility
Exchange (Basis volatility effect) (Speculation effect)
Bybit 3.8165 1.0535
Binance 4.811* 2.8506
FTX 1.8843 0.82581
BitMEX 24.537*** 0.86546
BTSE 1.7739 4.3875
Deribit 14.424*** 4.5421
Bitfinex 0.17942 4.1738
OKEx 18.457*** 13.753***
Kraken 0.36191 7.0719**
BaseFEX 0.32168 8.6802**
Gate.io 7.0644** 2.458
Critical Values
1%*** 5%** 10%*
9.210 5.991 4.605

VI. Empirical Robustness

We re-specify the basis volatility and speculation regression with one lag to test if we can
obtain significant results across more exchanges. Table 10 illustrates how we find slightly more
evidence for significance across more exchanges than with the two-lag model specification.
We find robust evidence of a basis volatility effect on BitMEX, OKEx, Deribit and Gate.io at a
1% significance level. We find evidence at a 10% level for Bybit, Binance and FTX. The
aforementioned exchanges see increases in speculative activity when there has been greater
decoupling of either sign between perpetual futures and spot prices the previous day.

The speculation effect is less positive on average across exchanges than the basis volatility
effect, since the positive difference between the likelihood ratio test statistic and critical value

18
is lower. The bidirectional Granger causal relationship is marginally greater from basis volatility
to speculation than vice versa. The speculation effect is the highest on BaseFEX followed by
OKEx and Kraken at a 1% significance level, there is also significance in order of BTSE, Binance
and Gate.io however at 10% and 5% levels. OKEx has particularly strong statistical evidence for
bidirectional causality in comparison to the other exchanges. Due to the differing sensitivity
across exchanges and differences in basis the results differ. There is a significant relationship
on some exchanges, however we note the drawback of our daily data. We expect one would
find more robust results across more exchanges using higher frequency data, daily data do not
contain the same level of information on futures and spot price variability.

Table 10 - Granger Causality Test Results- Turnover Ratio and Basis volatility (1 lag)
Basis volatility GC Turnover ratio GC Basis
turnover ratio volatility
Exchange (Basis volatility effect) (Speculation effect)
Bybit 3.7184* 0.00012
Binance 3.6994* 4.3162**
FTX 2.4298* 0.26099
BitMEX 24.024*** 1.2683
BTSE 1.1068 6.346**
Deribit 7.5208*** 0.002
Bitfinex 0.14266 1.4659
OKEx 19.783*** 10.384***
Kraken 0.05386 7.7217***
BaseFEX 0.30368 11.562***
Gate.io 7.3765*** 2.4719*
Critical Values
1%*** 5%** 10%*
6.635 3.841 2.271

The evidence for basis volatility and speculation bidirectional causality is weaker than the
returns volatility tests, in regard to how many exchanges we find strong evidence for. This
contradicts the theory suggested in (Chan, Nguyen and Chan, 2015). The authors note there
are instances where speculators may be more attracted to speculate on basis variability than
price variability; we find opposing evidence to this on our dataset. We also run a one lag model
specification on speculation and returns volatility however find weaker results than with two

19
lags (see Appendix II). We conclude two lags is the more appropriate model specification for
returns volatility and speculation.

VII. Conclusion

We find robust evidence of bidirectional Granger causality between speculation and returns
volatility across eight of the eleven exchanges, under a two-lag specification. The bidirectional
causality between basis volatility and speculation is less significant on average but still highly
statistically significant on a number of exchanges under a one-lag model. This study provides
robust evidence for basis volatility effects on BitMEX, OKEx, Deribit and Gate.io and robust
evidence for speculation effects on BaseFEX, OKEx, Kraken, BTSE and Binance. Price discovery
is well documented on crypto derivatives exchanges, however the literature on bidirectional
Granger causality between basis and speculation is sparse. The strong speculation effect to
returns volatility we found is also not as well documented in the literature than the returns
volatility to speculation relationship. Our evidence is vital for regulators to understand the
dynamics of how speculation interacts with perpetual futures returns volatility and basis
volatility.

The analysis in this study has limitations due to the frequency of data employed. We predict
the speculation examined would be far more apparent on minute or tick level data, although
using these data is beyond the scope of this study. We suggest further research could be run
on higher frequency data; it is expected more robust results could be found. We also question
the reliability of this data since if Granger causal effects are found on one exchange, it makes
intuitive sense this relationship should be found across all exchanges. Although, the absence
of significant results on some exchanges may again be down to the frequency of these data
rather than the reliability. Future research is suggested using data independently obtained
through APIs, which could eliminate the risk of data errors.

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 VIII. References

Cftc.gov. 2021. CFTC Charges BitMEX Owners with Illegally Operating a Cryptocurrency
Derivatives Trading Platform and Anti-Money Laundering Violations | CFTC. [online] Available
at: <https://www.cftc.gov/PressRoom/PressReleases/8270-20> [Accessed 29 April 2021].

Chan, L., Nguyen, C. and Chan, K., 2015. A new approach to measure speculation in the oil
futures market and some policy implications. Energy Policy, 86, pp.133-141.

Coinalyze.net. 2021. Bitcoin (BTC) Open Interest. [online] Available at:

<https://coinalyze.net/bitcoin/open-interest/> [Accessed 29 April 2021].

Dickey, D.A., and W.A. Fuller. 1979. “Distribution of the Estimators for Autoregressive Time
Series with a Unit Root.” Journal of the American Statistical Association 74 (366): 427–31.

Granger, C., 1969. Investigating Causal Relations by Econometric Models and Cross-spectral
Methods. Econometrica, 37(3), p.424.

Lucia, J. and Pardo, A., 2010. On measuring speculative and hedging activities in futures
markets from volume and open interest data. Applied Economics, [online] 42(12), pp.1549-
1557. Available at:
<https://www.tandfonline.com/doi/full/10.1080/00036840701721489?casa_token=CmywGk
86QfkAAAAA%3As1gfzH_J8AmWL110wSCRKyoQxoZydVDENRLd7L87JLFffkELrOQ6061cxCELw
RWZO5XQz0wn5aEl> [Accessed 20 February 2021].

Robles, M., Torero, M. and Von Braun, J., 2009. When Speculation Matters. Issue Brief.
[online] Washington, DC: International Food Policy Research Institute. Available at:
<https://www.ifpri.org/publication/when-speculation-matters> [Accessed 20 February 2021].

Wellenreuther, C. and Voelzke, J., 2018. Speculation and volatility-A time-varying approach
applied on Chinese commodity futures markets. Journal of Futures Markets, [online] 39(4),
pp.405-417. Available at:
<https://onlinelibrary.wiley.com/doi/full/10.1002/fut.21984?casa_token=lhinu1SopXcAAAAA
%3AF3CYdNtbVsegS4jF5DpzJSh2k7OtjJIirWHzN97J55KUjNFWGwO1QN69ZdFYg_KfQqTmQO_
L8ACG> [Accessed 22 February 2021].

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 IX. Appendix

Appendix I.

Table 7. ADF Test for Unit Root Without Constant - Test Statistics
Exchange |*!& | +,& |-& |
Bybit -4.785*** -3.063*** - 4.242***
Binance -4.849*** -2.672*** -4.416***
FTX -4.898*** -2.826*** -4.221***
BitMEX -4.862*** -2.646*** -5.667***
BTSE -4.819*** -2.837*** -4.668***
Deribit -4.788*** -3.056*** -4.062***
Bitfinex -4.766*** -4.348*** -6.986***
OKEx -4.821*** -2.691*** -5.716***
Kraken -4.793*** -2.901*** -5.404***
BaseFEX -4.866*** -1.045 -4.587***
Gate.io -4.850*** -2.447** -4.364***
Critical values 1%*** 5%** 10%*
-2.580 -1.950 -1.620

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Appendix II.

Table 11 - Granger Causality Test Results- Turnover Ratio and Returns Volatility (1 lag)
Returns volatility GC Turnover ratio GC returns
turnover ratio volatility.
Exchange (Returns volatility effect) (Speculation effect)
Bybit 5.9673** 4.4999**
Binance 6.1828** 3.2967*
FTX 5.1579** 3.8261*
BitMEX 4.6284** 9.2182***
BTSE 1.8412 0.7459
Deribit 15.822*** 3.9447**
Bitfinex 0.54247 0.01616
OKEx 3.4333* 10.338***
Kraken 5.8374** 4.5692**
BaseFEX 1.11 5.9399**
Gate.io 0.00393 0.01969
Critical Values
1%*** 5%** 10%*
6.635 3.841 2.271

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