Trading and Arbitrage in Cryptocurrency Markets

Abstract

Cryptocurrency markets exhibit periods of large, recurrent arbitrage opportunities across exchanges. These price deviations are much larger across than within countries, and smaller between cryptocurrencies, highlighting the importance of capital controls for the movement of arbitrage capital. Price deviations across countries co-move and open up in times of large bitcoin appreciation. Countries with higher bitcoin premia over the US bitcoin price see widening arbitrage deviations when bitcoin appreciates. Finally, we decompose signed volume on each exchange into a common and an idiosyncratic component. The common component explains 80% of bitcoin returns. The idiosyncratic components help explain arbitrage spreads between exchanges.JEL classification: G12, G15, F38

Risks and Returns of Cryptocurrency

“…Several recent papers (e.g., Stoffels, 2017, Borri, 2018, Borri and Shakhnov, 2018, Foley, Karlsen, and Putniņš (2018, and Hu, Parlour, and Rajan, 2018) document individual facts related to cryptocurrency investment. A number of recent papers develop models of cryptocurrencies (see, e.g., Weber (2016), Huberman, Leshno, and Moallemi (2017), Biais et al (2018), Chiu and Koeppl (2017), , Cong, Li, and Wang, 2018, Cong, He, and Li, 2018, Sockin and Xiong, 2018, Saleh, 2018, Schilling and Uhlig, 2018, Abadi and Brunnermeier (2018, Routledge and Zetlin-Jones (2018), and Makarov and Schoar (2018)).…”

Lead Behaviour in Bitcoin Markets

“…We remark that our work is related to some recent papers that explore the cross-country trading in cryptocurrency markets Makarov and Schoar (2019), the network dynamics across cryptocurrency markets Ji et al (2019) and the information content of trading volumes in crypto investing Bianchi (2019); Bouri et al (2019). We combine the views of the previous paper into a network-based analysis of bitcoin trading patterns across countries and trading groups.…”

Understanding Cryptocurrencies*

“…Their approach is complementary to other theoretical studies on bitcoin arbitrage such as Barker (2017) or Pieters and Vivanco (2015), where the researchers study triangular arbitrage with bitcoin, i.e., buying bitcoin in USD and selling them in RMB. Makarov and Schoar (2018) observe large recurrent arbitrage opportunities in crypto-currency prices relative to fiat currencies across exchanges. These opportunities often persist for several days or weeks, and the price dispersions exist even in the face of significant trading volumes on many of the exchanges.…”

“…This latent group structure in the cryptocurrency market leads them to conclude that comovements are influenced by the type of algorithm used. Makarov and Schoar (2018) study price deviations across cryptocurrency exchanges and interpret the deviations as the result of a balance between idiosyncratic sentiments of noise traders and the efforts of arbitrageurs to equilibrate prices across exchanges.…”