The Impact of Spoofing on Bitcoin Market Microstructure

This paper investigates spoofing in Bitcoin order books on the Coinbase platform. Using high-frequency data, we show that order-book imbalances predict Bitcoin returns at both minute-and hourly-level horizons. We introduce a novel metric to quantify spoofing intensity and document its pronounced effect on Bitcoin prices: higher bid spoofing intensity is associated with positive returns, whereas greater ask spoofing intensity is associated with negative returns. Spoofing activity intensifies during periods of elevated trading volume, enabling spoofers to extract larger profits. Our estimates indicate that, after controlling for other factors, a one-unit increase in spoofing volume corresponds to a 27-basis-point increase in bid spoofing profit and a 55-basis-point increase in ask spoofing profit. Finally, we demonstrate that spoofing widens bid-ask spreads and deteriorates overall market quality. These findings underscore the pervasive impact of spoofing on cryptocurrency market microstructure.