Bitcoin returns and transaction activity

This paper examines the empirical linkages between Bitcoin returns and transaction activity. Extant literature shows Bitcoin prices may be detached from economic fundamentals. The question that remains however is whether its price movements are linked with its transaction activity - a critical element of its growing market microstructure. Using number of Bitcoin transactions and unique addresses, respectively, to proxy for transaction activity, it is shown that a one standard deviation shock to transaction activity leads to just over a 0.30% gain in returns on the third day following the shock. By the sixth day, there is a reversal in price behavior and any such gains are expunged. When comparing the bidirectional linkages between returns and transaction activity, it is shown here that the contribution of return shocks to transaction activity is quantitatively larger in magnitude.