*2.2. Underlying Theory of the Microeconomic Indicators: Microstructure Theory*

The theoretical frameworks of the microstructure approach developed by Lyons [16] imply that the market information structure is asymmetric, which means not all market participants know about the market information. Some agents have their private information, not necessarily about fundamentals. Lyons found that order flow is the most critical determinant of exchange rate determination in the short run. According to Lyons [16], order flow can be measured as the number of buyer-initiated orders minus the number of seller-initiated orders in the market. In microeconomics, supply and demand is an economic market price determination model [17,18]. Theory and empirical evidence suggest that, for an asset with a given cash flow, the higher its market liquidity, the lower its expected return (e.g., [19,20]). Market liquidity affects asset prices and expected returns. In the Bitcoin market, the bid–ask spread factor as a proxy for market liquidity. As more and more buy and sell orders are placed, overall supply and demand become more and more

apparent. Some empirical studies also showed the short-term predictability of the Bitcoin microstructure. For example, Dyhrberg et al. [21] investigated the liquidity and transaction costs of Bitcoin markets as a microstructure analysis of Bitcoin. Scaillet et al. [22] showed the bid–ask spread has significant predicting power over jumps in Bitcoin price. In another study, Guo et al. [23] made a short-term prediction of BTC price fluctuations (measured with volatility) using buy and sell orders.

The private information in the BTC market is different from the stock market. In stock market trading, private information is referred to an improved understanding of a firm or company's prospects and provides a better evaluation of a potential cash flow. When a particular group of traders is made accessible to private information, it helps to create a clear-cut distinction between a BTC market and a stock market. However, it is essential to note that, like the stock market, BTC entertains an uninformed group of traders who enter the market for liquidity only. The questions here follow: What if there remains no future cash flow available for discounting or there remains no asset for valuation? In such a scenario, what exactly would private information provide?

It is indicated that the valuation of BTC is strongly dependent on the level of confidence of its traders. Hence, private information announces great estimation and prediction of the value that a BTC can potentially gain. These types of evaluations are dependent on the consumption of BTC and their usages. Private information like this adds to the prices of BTC and stimulates its demand. Since BTC has a fixed supply, private information helps increase the demand, increasing the prices in the global market. Data provided by the order book covers all the causes of demand and supply conditions of an asset in the form of bids and asks, which are implemented as trades ultimately. The data here provide an insight into the market's microstructure and an internal overview, which might not be easy to comprehend otherwise. Bid and ask price are two essential components of private information. The bid price refers to the highest price that a potential buyer of BTC is willing to pay. It is also referred to as the buying price for the exchange. When demand for BTC is high, the bid price increases, which means trading volume affects the bid price.

Ask price is the lowest price a seller wants to accept BTC. If the demand falls, there is a fall in the asking price as well. Ask prices are generally higher in comparison to bid prices. Therefore, the difference between these two prices, called the spread, is precisely the profit extracted in these exchanges. BTC prices are highly volatile, which causes extreme fluctuations along with the spreads, which is why sellers enter this market after a great deal of negotiation with the investors and traders to initiate a bidding war. Once that happens, this buying pressure will force an increase price.
