Bitcoin as an information anchor return and liquidity responses across the cryptocurrency market

Abstract

Research purpose: This study investigates the efficiency of the cryptocurrency market and examines how Bitcoin-related announcements affect returns and liquidity across a broad range of digital assets. Research design, approach, and method: The study employs an event study framework combined with regression analysis and difference-in-differences (DiD) estimation. The dataset consists of 63,504 daily observations across 48 cryptocurrencies from 2018 to 2023. Main findings: The empirical findings suggest that the cryptocurrency market exhibits inefficiencies, as evidenced by significant abnormal responses to Bitcoin-related announcements. Notably, negative news triggers stronger market reactions than positive news, although such effects tend to dissipate within a few days of the event. Moreover, Layer 1 cryptocurrencies appear unresponsive to these announcements, indicating a degree of segmentation in market behavior. Cryptocurrencies with larger market capitalizations exhibit greater sensitivity in liquidity measures but display relatively muted responses in return volatility compared to those with medium or small capitalizations. Practical/managerial implications: This research contributes to the literature on announcement effects and market efficiency in digital asset markets, and offers practical implications for investors seeking to manage risk and exploit short-term trading opportunities.