Trading and Arbitrage in Cryptocurrency Markets
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What they found
The authors documented enormous and persistent price differences for Bitcoin across exchanges and countries in 2017 and early 2018: prices in Korea were at times 40% above U.S. prices, and even within the U.S. exchange spreads were large. These gaps opened when Bitcoin was rallying and closed when it fell, consistent with capital controls and slow fiat transfers preventing arbitrageurs from moving money into the countries with the highest demand. They also showed that order flow explained a large share of Bitcoin returns and that signed order flow on one exchange predicted price moves on others.
What you can use
- Crypto arbitrage opportunities that look free are usually blocked by capital controls, withdrawal limits, and settlement delays; the profit is compensation for those frictions.
- The 'kimchi premium' and similar gaps widen in rallies, so they are a sentiment gauge, not just a mispricing.
- Order flow explains crypto returns even more than it explains stock or FX returns; flow-based signals matter.
Caveats
2017 to 2018 data, the peak of a bubble; cross-exchange gaps have narrowed substantially since as arbitrage capital and infrastructure improved.
Tags: crypto, arbitrage, exchanges, order-flow
Summaries are our own reading of the paper, not the authors' words. Educational only, not advice. Discuss it in Book Club.