Blockchain Markets Arbitrage Opportunities

The main idea of the research was to evaluate the arbitrage opportunities which are existing in the cryptocurrency markets, especially the Ethereum one by constructing the arbitrage index based on the cross-exchange price exchenge difference and additionally using the idea of extreme correlation which is existent in the cryptocurrency markets with the overall Ethereum architecture scability problems in order to predict the future price mismatch and providing the strategy how this mismatch could be exploited. The construction of mostly Ethereum and partially Bitcoin Arbitrage index in the first part of the research actually showed that there exist a huge price difference in asset’s prices on different exchanges and parts of the world. Arbitrage opportunities are much larger across regions than within by a model construction from July 2017 to June 2018. To analyse how this price deviations between exchanges emerge, the VAR model was constructed by decomposing the returns expressed in the total arbitrage index into a congestion component -Fees, market volume component - volume of placed Ethereum blockchain transactions, first-order differernce of the ethereum market capitalisation and the cross-blockchain market specific component – first-order difference of the Bitcoim market capitalisation. These results suggest that trading in Bitcoin or either in Ethereum creates price pressures on the blockchain architecture which results in a price difference to the higher extent across regions and to lesser within. Additionally, due to the extreme market correlation the price difference even response to a shock to another technically non-related blockchain market.