Effects of bitcoin exchange reserves on bitcoin returns and volatility Lai T. Hoang * and Dirk G. Baur The University of Western Australia August 10, 2021 Abstract This study shows that changes in bitcoin exchange reserves are negatively related to con- temporaneous and future bitcoin returns, consistent with the hypothesis that the transfer of bitcoin on exchanges implies increased price pressure and vice versa. We further identify an asymmetry between positive and negative reserve changes on bitcoin returns and volatil- ity which in turn also affect exchange reserves in extreme market conditions. The results indicate that a significant fraction of bitcoin investors store their wealth off exchanges and only use exchanges to trade. This highlights a special feature of cryptocurrency trading that does not exist in traditional markets. Keywords: blockchain, bitcoin; exchange reserves, price pressure, on-chain transactions, off-chain transactions JEL codes: E42; F31; G12; G17 * Corresponding author. Address: UWA Business School, The University of Western Australia, 35 Stirling Highway, CRAWLEY WA 6009, Australia. E-mail: lai.hoang@uwa.edu.au. Electronic copy available at: https://ssrn.com/abstract=3902504