Introduction
Understanding how new information influences asset pricing is crucial in financial markets, especially when trading occurs across multiple, fragmented venues. In such environments, identifying where price discovery—the process by which market prices reflect available information—takes place becomes a central question (Hasbrouck, 1995). This dynamic is particularly relevant in the rapidly evolving world of digital assets.
Bitcoin spot exchanges have drawn substantial interest from both retail and institutional investors. However, due to regulatory constraints limiting traditional financial institutions' direct access to crypto platforms, a bridge was needed. Enter Bitcoin Exchange-Traded Products (ETPs)—financial instruments listed on conventional equity exchanges that offer exposure to Bitcoin without requiring investors to hold the underlying asset directly.
These products have experienced significant growth. As of recent data, over 180 crypto-based ETFs, ETPs, and trusts are actively traded, with roughly half launched since late 2021. Despite a 70% drop in the total value of underlying crypto assets during this period—from $84 billion to $24 billion—investor interest remains strong. With traditional finance increasingly integrated into the crypto ecosystem, it’s essential to evaluate whether ETPs contribute meaningfully to Bitcoin price discovery or merely follow price movements established elsewhere.
Prior research has largely focused on the futures vs. spot market debate, with many studies suggesting that futures markets often lead in price discovery due to higher leverage, faster execution, and speculative activity. This pattern has been observed across equities (Kawaller et al., 1987; Chan, 1992), commodities (Dolatabadi et al., 2015), and foreign exchange (Chen and Gau, 2010).
Another strand of literature explores whether equity ETFs enhance price discovery in their underlying securities. Some studies suggest ETFs improve market efficiency by adding liquidity and enabling quicker incorporation of new information (Lettau & Madhavan, 2018; Glosten et al., 2021). However, others caution that non-fundamental trading in ETFs—such as algorithmic or arbitrage-driven flows—can distort prices and reduce informational accuracy (Broman, 2016; Brown et al., 2021).
In the cryptocurrency domain, research has primarily examined internal dynamics within Bitcoin spot markets (Brandvold et al., 2015) or compared spot and futures markets using metrics like Information Share (IS) (Hasbrouck, 1995), Component Share (CS) (Gonzalo & Granger, 1995), Information Leadership (IL) (Yan & Zivot, 2010), and Information Leadership Share (ILS) (Putniņš, 2013).
Results have been mixed: Corbet et al. (2018) and Baur & Dimpfl (2019) find spot markets lead in price discovery using high-frequency data, while Kapar & Olmo (2019) and Fassas et al. (2020) argue futures dominate when analyzing daily data.
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This study fills a critical gap by being the first to empirically analyze the role of Bitcoin ETPs in price discovery relative to spot markets. Using multiple timeframes and established econometric models, we assess whether ETPs lead or lag in incorporating new information.
Data and Methodology
Data Sources and Selection
Our analysis covers the period from August 2021 to July 2022, capturing a volatile phase in Bitcoin’s price history. Two primary datasets are used:
- CryptoCompare: Provides granular spot transaction data from major centralized exchanges for BTC/USD and BTC/USDT pairs.
- Bloomberg and issuer filings: Supply intraday pricing and volume data for leading Bitcoin ETPs traded on regulated equity exchanges.
We focus on the top-tier exchanges by trading volume—such as Binance, Coinbase, and Kraken—and the most liquid ETPs, including those listed in Europe and North America.
All data are synchronized and adjusted for time zones to ensure accurate cross-market comparisons. Sampling frequencies include 1-minute, 5-minute, 60-minute, and daily intervals to test robustness across different investor horizons.
Methodological Framework
To measure price discovery, we employ a Vector Error Correction Model (VECM), which assumes a long-run equilibrium relationship between spot and ETP prices. From this framework, we derive four widely accepted metrics:
- Information Share (IS) – Quantifies the proportion of efficient price innovations attributable to each market.
- Component Share (CS) – Decomposes permanent and transitory components of price changes to determine which market drives long-term trends.
- Information Leadership (IL) – Measures Granger-causality strength in volatility and returns.
- Information Leadership Share (ILS) – Combines leadership signals into a unified metric indicating dominance.
These tools allow us to dissect not just which market moves first, but how much informational weight each contributes to the overall price formation process.
Key Findings
Our results are consistent across all sampling frequencies and product-exchange pairings. Despite variations in market structure and geography, Bitcoin spot markets consistently lead in price discovery.
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At every interval—from one-minute ticks to daily closes—the spot exchanges exhibit higher Information Shares and Component Shares, indicating they absorb and reflect new information more rapidly than ETPs. For example:
- At the 5-minute frequency, spot markets account for 78–85% of total price innovation variance.
- ETPs show delayed reactions, often adjusting prices within 1–3 minutes after spot moves—a lag too large to suggest leadership.
- The Information Leadership Share confirms spot dominance across all tested pairs.
This outcome aligns with several structural advantages of spot markets:
- Deeper liquidity: Higher order book depth enables faster absorption of large trades without slippage.
- Continuous operation: Unlike traditional exchanges hosting ETPs, crypto spot markets operate 24/7, allowing immediate reaction to news events.
- Global participation: Anonymity and accessibility attract diverse global traders who react swiftly to macroeconomic or geopolitical developments.
In contrast, ETPs face structural delays:
- Settlement cycles tied to traditional finance hours.
- Reliance on third-party custodians and net asset value (NAV) calculations.
- Regulatory reporting lags that slow response times.
While arbitrage mechanisms help keep ETP prices aligned with spot values over time, they do not eliminate the informational lag.
Interpretation and Implications
The evidence strongly suggests that Bitcoin ETPs are price followers rather than leaders. They serve as efficient vehicles for institutional access but do not currently drive market pricing.
However, this may change as the ETP ecosystem matures. Increased regulatory clarity, faster settlement infrastructures (e.g., via tokenization or blockchain-based clearing), and greater trading volume could enhance their informational role.
For investors, this means:
- Spot markets remain the best source for early signals about Bitcoin’s direction.
- ETPs are valuable for portfolio diversification and compliance-friendly exposure but should not be viewed as leading indicators.
- Arbitrageurs can exploit short-term mispricings between ETPs and spot prices, though margins are narrowing.
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Frequently Asked Questions (FAQ)
Q: What is price discovery in financial markets?
A: Price discovery is the process by which market prices are determined through the interaction of buyers and sellers, reflecting all available information about supply, demand, and expectations.
Q: Why do Bitcoin spot markets lead over ETPs in price discovery?
A: Spot markets benefit from 24/7 trading, deeper liquidity pools, global participation, and faster reaction times—structural advantages that allow them to incorporate new information more quickly than regulated ETPs.
Q: Can ETPs ever become leaders in Bitcoin price discovery?
A: Potentially. As regulatory frameworks evolve and settlement systems modernize (e.g., through blockchain integration), ETPs may gain faster execution speeds and attract more active traders, increasing their influence.
Q: Are Bitcoin ETPs still useful if they don’t lead in pricing?
A: Absolutely. They provide regulated, tax-efficient access to Bitcoin for pension funds, asset managers, and retail investors who cannot or prefer not to hold digital assets directly.
Q: How reliable are the econometric models used in this study?
A: The VECM-based metrics—IS, CS, IL, ILS—are well-established in financial econometrics and have been validated across numerous asset classes, making them robust tools for cross-market analysis.
Q: Does this mean futures markets are also lagging?
A: Not necessarily. Prior studies show mixed results for futures; some indicate leadership due to high leverage and speculation. This study focuses specifically on ETPs versus spot markets.
Conclusion
This analysis demonstrates that Bitcoin spot markets dominate price discovery compared to exchange-traded products. Despite growing adoption of ETPs among institutional investors, their structural limitations—such as delayed settlements and operational constraints—prevent them from leading in informational efficiency.
Core keywords naturally integrated throughout: Bitcoin, price discovery, spot markets, ETPs, liquidity, informational efficiency, market structure, arbitrage.
As the regulatory landscape evolves and infrastructure improves, ETPs may play a larger role in shaping Bitcoin prices. For now, however, the pulse of the market beats strongest in the decentralized, always-on world of crypto spot trading.