Price dynamics of cryptocurrencies in parallel markets: evidence from Bitcoin exchanges in Brazil

Abstract

Purpose This paper aims to study the dynamics of bitcoin prices in Brazil, a large emerging economy with an unregulated bitcoin market. Design/methodology/approach First, this study tests if the Law of One Price (LOOP) is valid for bitcoin prices in Brazil, conducting tests with data from three Brazilian exchanges. Next, this study documents bitcoin price dynamics in the short run by studying the price discovery mechanism in these exchanges. This study uses Information Share and Component Share, combining the two measures to obtain an Information Leadership Share (ILS) measure. Findings This study finds a common trend within bitcoin prices among a set of exchanges, with cointegration tests between the price series indicating that LOOP is valid in Brazilian markets in the long run. ILS indicated that, for closing prices, the most liquid exchange (Foxbit) leads discovery, whereas the least liquid (Local Bitcoin) lags, with Mercado Bitcoin in the middle both in terms of discovery and liquidity. Finally, this study provides evidence that the price variation in the market that leads price discovery can be used to construct an arbitrage in another exchange. Originality/value This research brings the first evidence of a price discovery mechanism for exchanges in Brazilian Reais. Although LOOP is valid in the long run, price leadership in bitcoin markets potentially create arbitrage opportunities in the short run. This study contributes to the growing literature of bitcoin prices with novel evidence from a large emerging economy.

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“…, 2017). They also can overwhelm the operation cost through admittance to the Internet (Andrade et al. , 2021).…”

“…high return (Kristoufek, 2015;Hong, 2018), low transaction charge, security (Bariviera et al, 2017) and an alternative tool for bailout mechanism of the country (Bouri et al, 2017). They also can overwhelm the operation cost through admittance to the Internet (Andrade et al, 2021).…”

Do financial innovations influence bank performance? Evidence from China

“…Therefore, considering recent experience, reckless entry by the banking sector into Fintech development, and the desire to incorporate such veiled risks for diversification and profitability, should perhaps be considered with caution in light of recent sectoral fragility. Perhaps, substantive evidence of irrational exuberance should act as a warning to the inherent risks incorporated (Cheah and Fry, 2015; Gandal et al , 2018; Corbet et al , 2018; Griffin and Shams, 2020; Gemici and Polat, 2020; Andrade et al , 2021; Hazgui et al , 2021), with a revised warning that the traditional banking sector should not forget recent lessons of the past and that their primary duty and service to the customer is that of banking. However, we weigh this concern with the caveat that the only way to progress an entire sector is through exploration and some moderate risk-taking.…”