Bitcoin arbitrage and exchange default risk

Weiwei Guo; Silvia Intini; Hossein Jahanshahloo

doi:10.1016/j.frl.2024.106364

Bitcoin arbitrage and exchange default risk

Weiwei Guo, Silvia Intini, Hossein Jahanshahloo^*

^*Corresponding author for this work

Management Sciences

Research output: Contribution to journal › Article › peer-review

Abstract

We investigate how exchange default risk and liquidity affect Bitcoin cross-exchange arbitrage opportunities. Analysing minute-level data from 16 cryptocurrency exchanges (April 2013–April 2024), we find arbitrage opportunities last longer when higher-risk exchanges have higher prices, as traders are cautious of default risks. There is a strong positive relation between capital flows from high-risk to low-risk exchanges and arbitrage opportunities, showing a preference for safer exchanges. Liquidity accelerates arbitrage by enabling faster execution, but high transaction fees and blockchain congestion slow capital transfers. The paper highlights exchange risk, liquidity, and transaction costs as key factors in Bitcoin market efficiency.

Original language	English
Article number	106364
Journal	Finance Research Letters
Volume	71
Early online date	2 Nov 2024
DOIs	https://doi.org/10.1016/j.frl.2024.106364
Publication status	Published - Jan 2025

Keywords

Arbitrage
Bitcoin
Cryptocurrencies
Default risk
Exchanges

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10.1016/j.frl.2024.106364Licence: CC BY

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title = "Bitcoin arbitrage and exchange default risk",

abstract = "We investigate how exchange default risk and liquidity affect Bitcoin cross-exchange arbitrage opportunities. Analysing minute-level data from 16 cryptocurrency exchanges (April 2013–April 2024), we find arbitrage opportunities last longer when higher-risk exchanges have higher prices, as traders are cautious of default risks. There is a strong positive relation between capital flows from high-risk to low-risk exchanges and arbitrage opportunities, showing a preference for safer exchanges. Liquidity accelerates arbitrage by enabling faster execution, but high transaction fees and blockchain congestion slow capital transfers. The paper highlights exchange risk, liquidity, and transaction costs as key factors in Bitcoin market efficiency.",

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AB - We investigate how exchange default risk and liquidity affect Bitcoin cross-exchange arbitrage opportunities. Analysing minute-level data from 16 cryptocurrency exchanges (April 2013–April 2024), we find arbitrage opportunities last longer when higher-risk exchanges have higher prices, as traders are cautious of default risks. There is a strong positive relation between capital flows from high-risk to low-risk exchanges and arbitrage opportunities, showing a preference for safer exchanges. Liquidity accelerates arbitrage by enabling faster execution, but high transaction fees and blockchain congestion slow capital transfers. The paper highlights exchange risk, liquidity, and transaction costs as key factors in Bitcoin market efficiency.

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KW - Bitcoin

KW - Cryptocurrencies

KW - Default risk

KW - Exchanges

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Bitcoin arbitrage and exchange default risk

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