Trading and Arbitrage in Cryptocurrency Markets

56 Pages Posted: 21 May 2018 Last revised: 12 Jul 2019

See all articles by Igor Makarov

Igor Makarov

London School of Economics & Political Science (LSE)

Antoinette Schoar

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Date Written: April 30, 2018

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.

Keywords: cryptocurrencies, bitcoin, limits to arbitrage, order flow, price impact

JEL Classification: G1, G10, G12, G14

Suggested Citation

Makarov, Igor and Schoar, Antoinette, Trading and Arbitrage in Cryptocurrency Markets (April 30, 2018). Available at SSRN: https://ssrn.com/abstract=3171204 or http://dx.doi.org/10.2139/ssrn.3171204

Igor Makarov (Contact Author)

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

Antoinette Schoar

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

50 Memorial Drive, E52-447
Cambridge, MA 02142
United States
617-253-3763 (Phone)
617-258-6855 (Fax)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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