The impact of margin trading and short selling by retail investors on market price efficiency: Empirical evidence from bitcoin exchanges

•I apply a difference-in-differences approach with four other comparable bitcoin exchanges to infer causality.•Potential composite use of margin trading and short selling of bitcoins is associated with lower market price efficiency.•Margin trading of bitcoins more likely causes the composite effect of both trading instruments.•If margin traders are more likely sophisticated retail investors, the negative impact of margin trading is less pronounced. I exploit the high fraction of retail investors in the early years of Bitcoin and the introduction of margin trading and short selling by the Bitcoin Exchange Kraken to apply a difference-in-differences approach. I document that the potential composite use of margin trading and short selling is associated with lower market price efficiency. Moreover, I find that more likely short selling relative to margin trading is positively related to market efficiency indicating that margin trading causes their negative composite effect. If margin traders are more likely sophisticated retail investors, the negative impact of margin trading is less pronounced.