Trading and Arbitrage in Cryptocurrency Markets

45 Pages Posted: 21 May 2018

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

This paper studies the efficiency and price formation of bitcoin and other cryptocurrency markets. First, there are large recurrent arbitrage opportunities in cryptocurrency prices relative to fiat currencies across exchanges that often persist for several days or weeks. These price dispersions exist even in the face of significant trading volumes on many of the exchanges. The total size of arbitrage profits just from December 2017 to February 2018 is above of $1 billion. Second, arbitrage opportunities are much larger across than within the same region; they are particularly large between the US, Japan and Korea, but smaller between the US and Europe. But spreads are much smaller when trading one cryptocurrency against another, suggesting that cross-border controls on fiat currencies play an important role. Finally, we decompose signed volume on each exchange into a common component and an idiosyncratic, exchange-specific one. We show that the common component explains up to 85% of the variation in bitcoin returns and that the idiosyncratic components of order flow play an important role in explaining the size of the 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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