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Cryptomarket Discounts∗

Nicola Borri Kirill Shakhnov


LUISS EIEF

This version: October 1, 2018

Abstract

This paper studies the efficiency of cryptocurrency markets. We consider 109 exchanges
around the globe where investors can trade bitcoin for different fiat and cryptocurrency
pairs and discuss the shape and structure of the distribution of daily bitcoin prices
across different markets, currencies and time periods. We find that the typical price
distribution is symmetric and leptokurtic with a standard deviation that varies over
time between 2% to 9%. We find that a large fraction of the time variation in the
dispersion of bitcoin prices depends on fluctuations in counter-party risk, liquidity, and
global demand for bitcoins. On a given day, we find that 67% of the dispersion is due
to price differences across exchanges located in different geographical locations. Panel
estimates indicate that the variability of bitcoin discounts is lower the lower counter-
party risk and bid-ask spreads. Temporary and permanent exchange shut downs are
also associated in a reduction in bitcoin discounts in other markets.

Keywords: bitcoin; cryptocurrencies; market anomalies; cryptomarkets


JEL Classification: G12, G14, G15, F31


Borri: Department of Economics and Finance, LUISS University, Viale Romania 32, 00197 Rome, Italy;
nborri@luiss.it; Tel: +39 06 85225959; http://docenti.luiss.it/borri. Shakhnov: EIEF, Via Sallustiana 62,
00187 Rome, Italy ; kirill.shakhnov@eief.it; Tel: +39 06 47924872; https://sites.google.com/site/kshakhnov/.
We thank Bob Chirinko, Juan Passadore, Anton Tsoy, Sergei Kovbasyuk and seminar participants at LUISS,
EIEF, Crypto Valley Conference on Blockchain Technology, Technische Universität Berlin, Bank of Italy.
1 Introduction

This paper studies the efficiency of cryptocurrency markets. We consider 109 exchanges
around the globe where investors can trade bitcoin for different fiat and cryptocurrency
pairs and discuss the shape and structure of the distribution of daily bitcoin prices across
different markets, currencies and time periods. We find that the typical price distribution is
symmetric and leptokurtic with a standard deviation that varies over time between 2% to
9%. We find that a large fraction of the time variation in the dispersion of bitcoin prices
depends on fluctuations in counter-party risk, liquidity, and global demand for bitcoins. On
a given day, we find that 67% of the dispersion is due to price differences across exchanges
located in different geographical locations. Panel estimates indicate that the variability of
bitcoin discounts is lower the lower counter-party risk and bid-ask spreads. Temporary and
permanent exchange shut downs are also associated in a reduction in bitcoin discounts in
other markets.
Cryptocurrencies are a growing asset class, with a total market capitalization of 550 bil-
lions of U.S. dollars at the end of January 2018. We focus on bitcoin because it was the
first cryptocurrency, created in 2009 using a scheme proposed by Nakamoto (2008), and it
currently accounts for 34% of the total market capitalization and trading volume. Bitcoins
started trading in 2010 on the Mt. Gox exchange, now defunct, and are now traded 24/7
every day in several exchanges in the world. Most of these exchanges opened in 2013, and
this is when our data start. Bitcoins traded in different exchanges are a homogenous asset.
Therefore, if markets are competitive and in the absence of transaction costs and trade re-
strictions, the law of one price (LOP) should hold and bitcoin prices, at a given point in
time, should be equal across different exchanges when expressed in the same currency. How-
ever, in practice, the dollar prices of one bitcoin differ greatly between different exchanges.
We refer to these differences as discounts (or premium, when the discount is positive). If
there are no transaction costs, investors should follow arbitrage strategies in the presence
of violations of the LOP. However, in practice, these strategies might be difficult or costly
to implement. First, investors must pay a number of fees: transaction and withdrawal fees
to the exchanges; currency conversion fees on the spot market; and fees to miners when
transferring bitcoins through exchanges. Second, constraints with respect to the speed of
execution limit substantially the possibility of pure arbitrage strategies. Third, for investors
to trade on a given exchange a registration process is required and several exchanges have
restricted the number of new registrations or introduced a minimum initial mandatory de-
posit. Fourth, only recently some exchanges have introduced the possibility of short-selling.
Finally, restrictions to international capital flows could limit investors’ ability to transfer

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money in and out of some of the countries in which the exchanges in our sample operate.
The contribution of this paper is threefold. First, we collect and merge data from multiple
data sources to provide a novel and comprehensive summary of stylized facts for cryptocur-
rency makets, including measures of liquidity, counter-party risk, network congestion, mining
activity, exchange locations and local bitcoin demands. Second, we document extensively
large and persistent price deviations in bitcoin prices across markets and currencies. We find
that these deviations are large, persistent, and time-varying. Third, we decompose the total
variability in bitcoin discounts in three components listed by order of importance: time,
location-time, and location-currency-time. We estimate time-series regressions and find that
a large fraction of the time variation in the dispersion of bitcoin prices depends on fluctua-
tions in counter-party risk, liquidity, and global demand for bitcoins. Panel estimates show
that the variability of bitcoin discounts is lower the lower counter-party risk and bid-ask
spreads. Temporary and permanent exchange shut downs are also associated in a reduction
in bitcoin discounts in other markets.
This paper contributes first to the small but fast-growing economic literature on bitcoins
and cryptocurrencies. Yermack (2013), Velde et al. (2013), and Dwyer (2015) are excellent
primers that describe the functioning of the blockchain and cryptocurrencies1 . Schilling
and Uhlig (2018) propose a simple model to study how do bitcoin prices evolve and the
implications for monetary policy. Catalini and Gans (2016), Biais et al. (2018), and Ma
et al. (2018) analyze from the perspective of economic theory how blockchain technology
and cryptocurrencies will influence the rate and direction of innovation and the incentives
and equilibria behind the ”proof of work” protocols. Gandal et al. (2017) use a unique
dataset to investigate suspicious trading activity on the Mt. Gox exchange in 2013 that
appears to have inflated bitcoin prices. Catania et al. (2018) study the predictability of the
volatility of the main cryptocurrencies, Osterrieder and Lorenz (2017) and Borri (2018) the
bitcoin tail behavior and spillovers to different markets. Second, this paper contributes to
the large finance literature on market efficiency and anomalies as well as limits to arbitrage.
Musto et al. (2018) study illiquidity discounts among Treasuries during the financial crisis.
Du et al. (2018) find large, persistent and systematic deviations from the covered interest
parity and relate them to the effect of banking regulation on asset prices. Lee et al. (1991);
Chen et al. (1993) relate discounts on closed-end funds, i.e., the difference between their
market prices and the market values of the assets they own, and investors’ sentiment. Borri
and Verdelhan (2011) provide evidence that closed-end fund discounts are a measure of
aggregate risk. Lamont and Thaler (2003) and Cochrane (2002) analyze possible mispricing

1
There exists also a large literature on blockchain technology with a focus on security, anonymity, scala-
bility, and data integrity from researchers in computer science that is outside the scope of our analysis.

3
in tech stock carve-outs.Shleifer and Vishny (1997); Liu and Longstaff (2003); Mitchell et al.
(2002); Scheinkman et al. (2003); Gromb and Vayanos (2010) are empirical and theoretical
papers that analyze both markets with arbitrage opportunities and limits to arbitrage.
The rest of the paper is organized as follows: section 2 describes the data; section 3
presents the bitcoin discounts, our measure of price dispersion; section 4 analyze the deter-
minants of bitcoin discounts; section 5 presents our conclusions.

2 Bitcoin Data
Investors can purchase bitcoins using fiat currencies or cryptocurrencies in different ex-
changes across the globe. There are two types of exchanges where investors can trade bit-
coins and other cryptocurrencies. The first, are exchanges on which cryptocurrency pairs
are traded (e.g., bitcoin for ethereum), and where investors can deposit and withdraw only
cryptocurrencies; the second, is instead exchanges where is possible to trade fiat curren-
cies for cryptocurrencies (e.g., U.S. dollar for bitcoin), and where investors can deposit and
withdraw both fiat and cryptocurrencies. Crypto exchanges operate every day 24/7, in-
cluding Saturdays, Sundays, and holidays, and use the UNIX time-stamp to track time and
ensure immediate comparability of market prices. We collect hourly bitcoin price and vol-
ume data on all exchanges listed on the data aggregator cryptocompare using a Python
script. The longest sample is for the period January 1, 2014, to July 11, 2018, but sam-
ples differ for different currency pairs and tend to be shorter for cryptocurrency pairs. We
compute end-of-day prices and daily volume of transactions corresponding to 16:00 GMT,
and drop observations corresponding to Saturdays, Sundays, and additional non-business
days, to match bitcoin daily prices in all markets to daily spot rates for fiat currencies from
WM/Reuters corresponding to 16:00 GMT. For cryptocurrencies, the exchange rate is the
units of cryptocurrency per dollar on the Kraken exchange. The bitcoin hourly prices, for
the different exchanges, correspond to the last transaction of the hour. The advantage of
this procedure is that we can exactly match bitcoin prices to spot rates. However, this also
implies that we could use, for some markets, bitcoin prices corresponding to hours of the
day with a smaller volume. For example, 16:00 GMT corresponds to 1 AM in Seoul. The
number of exchanges and currency pairs increases over time. Panel A of table 1 reports
information on the initial raw data. We start off a large sample containing data from 141
different exchanges and 422 currency pairs. Note that we treat each currency pairs as a
different asset. For example, we treat differently the U.S. dollar to bitcoin pair in market A
and the U.S. dollar to bitcoin pair in market B. Similarly, the U.S. dollar to bitcoin and the
euro to bitcoin pairs, both in market A, are also different assets.

4
Table 1: Our sample

Panel A: Raw data


Exchanges Assets Observations
Fiat 76 203 178820
Crypto 65 219 68554
Panel B: Sample after data cleaning
Exchanges Assets Observations
Fiat 64 144 60676
Crypto 45 162 41622

Notes: This table reports information on the total number of exchanges, assets, and daily observations of the initial raw data
(panel A) and the sample after data cleaning (panel B). In each panel, the rows labeled ”fiat” refer to bitcoin-fiat currency
pairs and those labeled ”crypto” to bitcoin-crypto currency pairs. Details on the data cleaning are reported in section 2. Data
are from cryptocompare and Datastream for the period 1/1/2014–7/11/2018.

We impose some selection criteria on the observations to include in the final sample. First,
we eliminate all observations corresponding to days in which the volume of transactions for
a given currency pair is equal to zero as these occur in correspondence to temporary shut-
downs of the exchanges, for example, because of cyber attacks and software maintenance
or malfunction. Second, we exclude currency pairs with less than 60 observations. This
selection criterion excludes from the sample three cryptocurrencies (BTS, DAI, and QS) and
two fiat currencies (the Turkish lira and the Peruvian sol) with short time series and low
volume of transactions. Third, in order to avoid the possible influence of a small number
of outliers on measured bitcoin price dispersion, we exclude observations corresponding to
ratios between the bitcoin price in any given asset and the price of the bitcoin-to-U.S. dollar
pair on the Kraken exchange greater, in absolute value, than 75 percent. When we calcu-
late these ratios, we use the bitcoin-to-U.S. dollar pair on the Coinbase exchange whenever
prices on Kraken are not available. Fourth, we drop bitcoin to gold pairs, as the latter is a
commodity. Fourth, because of data reliability, we drop data from LocalBitcoins, which is a
peer-to-peer platform, and from Coincap, Trustdex, and Wavesdx because we were not able
to identify their geographical locations after direct examination of their websites. Fifth, we
drop data from BitflyerFX because they correspond to the future rather than spot prices.
Panel B of table 1 reports the total number of exchanges, assets, and observations, for both
fiat and crypto pairs, of our final sample after data cleaning. The final sample contains data
from 99 exchanges: 57 exchanges where bitcoin-fiat currency pairs are traded, and 42 where
bitcoin-crypto currency pairs are instead traded. The total number of assets is 280: 132
bitcoin-fiat currency pairs, and 148 bitcoin-crypto currency pairs. The bitcoin-crypto pairs

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in the final sample are with bitcoin cash (BCH), ethereum classic (ETC), ethereum (ETH),
litecoin (LTC), tether (USDT), and ripple (XRP). Note that the number of cryptocurren-
cies has increased substantially since the launch of bitcoin in 2009. Table 2 reports, for
the cryptocurrencies in the sample, market capitalization, daily volume of transactions, and
release date. Bitcoin, ethereum, and ripple are the main cryptocurrency by market capital-
ization, while bitcoin cash, litecoin, tether and ethereum classic account for approximately
10% of the total cryptocurrency market capitalization. The bitcoin-fiat pairs are, instead,
with the Australian dollar (AUD), the Brazilian real (BRL), the Canadian dollar (CAD), the
Swiss franc (CHF), the Chiliean peso (CLP), the Chinese yuan (CNY), the Danish Krone
(DKK), the euro (EUR), the British pound (GBP), the Ghanian Cedi (GHS), the Hong
Kong dollar (HKD), the Indonesian rupiah (IDR), the Israeli new shekel (ILS), the Indian
rupee (INR), the Japanese yen (JPY), the Kenyan shilling (KES), the South Korean won
(KRW), the Mexican peso (MXN), the Malaysian ringgit (MYR), the Nigerian naira (NGN),
the Philippine peso (PHP), the Pakistani rupee (PKR), the Polish zlot (PNL), the Russian
ruble (RUB), the Singapore dollar (SGD), the Thai bath (THB), the Tanzanian shilling
(TZS), the Ukrainian hryvnia (UAH), the U.S. dollar (USD), the Vietnamese dong (VND),
the South African rand (ZAR).

Table 2: Cryptocurrencies
Rank Name Market Cap Price Volume Release Supply Supply
in bln $ in $ in bln $ (24h) Date Max in mln Circulating in mln
1 Bitcoin 116.7 6,756 5.6 9-Jan-09 21 17.3
2 Ethereum 23.2 227 2.3 30-Jul-15 No cap 102.1
3 XRP 21.1 1 2.2 26-Sep-13 39809.1 39809.1
4 Bitcoin Cash 8.4 482 0.5 1-Aug-17 21 17.4
7 Litecoin 3.4 58 0.3 7-Oct-11 84 58.4
8 Tether 2.8 1 3.9 1-Jan-15 2756.4 2756.4
15 Ethereum Classic 1.2 11 0.2 25-Oct-16 No cap 104.7
of top 2000 crypto 222.0 18.6
Notes: This table lists the market capitalization, in billions of U.S. dollars, of the cryptocurrencies in our sample. For
each cryptocurrency, the table also reports its rank in terms of market capitalization, dollar price, daily volume in
billions of U.S. dollars, date of release, and maximum and circulating supply. Data are for September 21, 2018, from
https://coinmarketcap.com/. ”of top 2000 crypto” refers to all the cryptocurrencies tracked by the data aggregator.

3 Bitcoin Discounts
In this section, we first document the extent of bitcoin price dispersion and how it varies
across currencies, geographical location of the exchanges and time. We then propose a
decomposition of the variance of bitcoin discounts into currency, geographical location, and
time components and discuss their determinants.

6
3.1 Measuring Bitcoin Discounts

We take the perspective of U.S. investors who can trade bitcoins at time t in a set of
?
m = 1, . . . , M markets. We denote with Pm,j,t the units of currency j = 1, . . . , J required
to buy one bitcoin in market m in period t (i.e., a day). We also denote with Stj the spot
exchange rate expressed in units of currency j (i.e., fiat or crypto) per U.S. dollar and with

Stj
Pm,j,t = ?
Pm,j,t

the units of bitcoin that one U.S. dollar can buy in market m and currency j at time t. In
the absence of any frictions, by the law of one price, U.S. investors should get the same units
of bitcoin per dollar in each market m. In fact, there exist large persistent and time-varying
price differences. Investors are aware of these price differences. For example, at the end of
2017, the financial press and investors’ online forums went to great length to discuss and
analyze the so-called ”Kimchi Premium”, describing the fact that buying bitcoins on South
Korean exchanges in Korean won was much more expensive than in other exchanges across
the globe, after accounting for the currency conversion. This is evident in figure 1 which
plots the U.S. dollar prices of 1 bitcoin on three Korean exchanges (Bithumb, Korbit, and
Coinone) and on Kraken, one of the largest U.S. dollar-based exchange by trading volume.
Starting approximately in December 2017, the U.S. dollar prices of one bitcoin started to

Figure 1: Kimchi Premium

Kimchi Premium: US Dollars per Bitcoin


25
kraken (usd)
bithumb (krw)
korbit (krw)
coinone (krw)

20

15
x000

10

0
09/17 10/17 11/17 12/17 01/18 02/18 03/18 04/18 05/18 06/18 07/18 08/18

Notes: Daily U.S. dollars bitcoin prices on Kraken, Bithumb, Korbit, and CoinOne. Bitcoin prices in Korean Won (KRW) are
converted to U.S. dollars using the daily spot exchange rate. The Kraken exchange was shut down on 15-16 January 2018.
Data are daily from cryptocompare.com and Thomson Reuters for the period 9/1/2017–7/11/2018.

7
diverge between the Korean exchanges and Kraken and, for example, in January 2018 buying
Bitcoins on Korbit was more than 60 percent more expensive than on Kraken.
In order to measure the dispersion in daily bitcoin prices in different markets and curren-
cies, we introduce the daily bitcoin discounts, defined as the ratio between the bitcoin dollar
price in market m and currency j and the volume weighted average price across all markets
and currencies in day t

Pm,j,t
Dm,j,t = −1 (1)
P̄t
where

M P
P J
Pm,j,t Qm,j,t
m j
P̄t = M P
J
P
Qm,j,t
m j

and Qm,j,t is the volume of transactions in market m and currency j in date t expressed
in bitcoins. If Dm,j < 0, then U.S. investors get a smaller number of bitcoins in market m
and currency j than for the average asset. On the contrary, if Dm,j > 0, then U.S. investors
get a larger number of bitcoins in market m and currency j than in the average asset. When
Dm,j = 0, then the law of one price holds and investors get the same number of bitcoins in
all markets and currencies.
Historically, the first traded currency pair with bitcoin was the U.S. dollar. Only at a
later date, investors could start trading first bitcoins to different fiat currencies, and then
bitcoin to cryptocurrencies. U.S. investors trading bitcoin for fiat currencies different from
the U.S. dollar must use the currency spot market, which is open only during business days
and hours. In addition, these investors must likely wait some time, potentially even sev-
eral days, before completing their transaction and transfer currency in different markets.
For example, forex transactions are typically settled in two days. Moreover, transferring
capital across different markets may be subject to country-specific regulations, or controls,
that might further delay the process. On the contrary, investors trading bitcoin for cryp-
tocurrencies require a significantly shorter length of time, usually hours or less, to complete
their transactions and are not effectively subject to country-specific regulations and capital
controls. For these reasons, in the analysis that follows we consider separately the properties
of bitcoin-to-fiat and bitcoin-to-crypto discounts.
Figure 2 and 3 plot the time-series of bitcoin discounts, respectively for fiat and cryp-
tocurrency pairs, and indicate that bitcoin discounts are typically different from zero, positive
or negative, and very volatile. Daily discounts can be as large as 50% in absolute value for

8
both bitcoin-to-fiat and to cryptocurrency pairs. Specifically, bitcoin-to-fiat discounts range
from -56% to 74%, while bitcoin-to-crypto from -75% to 74%. Casual inspection of figures 2
and 3 also reveals that bitcoin discounts are persistent. We estimate a simple first-order au-
toregressive model and find it explains a large fraction of the time-series variability of bitcoin
discounts for most assets. Specifically, for bitcoin-to-fiat the mean R2 is approximately 35%
and the mean autoregressive coefficient is equal to 0.54. For bitcoin-to-crypto, the mean R2
is lower and equal to 9%, and the mean autoregressive coefficient is equal to 0.22. Figure 4
plots the distribution of the autoregressive coefficients for all the bitcoin-to-fiat (left panel)
and bitcoin-to-crypto (right panel) assets and indicate that discounts are persistent, and
more persistent for the bitcoin-to-fiat pairs. In the appendix, we show that bitcoin discounts
are non-zero and persistent even if we consider a small subsample, with no exchange rate
risk, that includes only the bitcoin-to-dollar assets. Note that the magnitude of bitcoin dis-
counts is sizable compared to discounts in other markets and assets. For example, Gagnon
and Karolyi (2010) find that the mean discount for ADRs (American Deposit Receipts) is 4.9
basis points with a daily standard deviation for a given stock pair of 1.4%, even though they
observe extreme deviations as large as -40% and 127%. Wexin et al. (2018) find mean daily
deviations for the covered interest parity that range from 6 to 19 basis points annualized,
with standard deviations from 4 to 23 basis points. In the next section, we show that the
dimension of the documented bitcoin discounts is also an order of magnitude larger than
typical transaction costs and bid-ask spreads in cryptoexchanges.

We compute statistics of the distribution of bitcoin discounts over every market m, cur-
rency j, and day t, and report them in table 3 while figure 5 illustrates the average price
distribution for fiat and cryptocurrency pairs. When we consider bitcoin-to-fiat currency
pairs, the average standard deviation is 5.1%; the average 90-10 percentile ratio is 1.080;
the average 90-50 percentile ratio is 1.032; and the average 50-10 percentile ratio is 1.047.
These numbers reveal that there is the substantial dispersion in the price at which bitcoins
are sold in a given market, currency, and day. Moreover, the similarity of the average 90-50
ratio and the average 50-10 ratio implies that the price distributions are roughly symmetric.
Therefore, the price dispersion that we observe is not driven by a small number of very
low-priced transactions, for example, due to highly illiquid markets. We find substantial
and symmetric price dispersion also when we consider only bitcoin-to-crypto currency pairs,
even though the average standard deviation is now lower, and equal to 4.0%. We also report
the values for the kurtosis which are large and indicate tail data exceeding the tails of the
normal distribution.

9
Figure 2: Bitcoin-to-Fiat Discounts

1
.5
Discount
0
−.5

2014 2015 2016 2017 2018

Notes: This figure plots the bitcoin discounts for all the bitcoin-to-fiat currency pairs in our sample. Discounts are defined
according to equation (1), and denote the percentage difference in the number of bitcoins that one U.S. dollar can buy using
different currency pairs on different exchanges with respect to the average price. Discounts are multiplied by 100. Data are
daily from cryptocompare.com and Thomson Reuters for the period 1/1/2014–7/11/2018.

Figure 3: Bitcoin-to-Crypto Discounts


1
.5
Discount
0 −.5
−1

2014 2015 2016 2017 2018

Notes: This figure plots the bitcoin discounts for all the bitcoin-to-crypto currency pairs in our sample. Discounts are defined
according to equation (1), and denote the percentage difference in the number of bitcoins that one U.S. dollar can buy using
different currency pairs on different exchanges with respect to the average price. Discounts are multiplied by 100. Data are
daily from cryptocompare.com and Thomson Reuters for the period 1/1/2014–7/11/2018.

10
Figure 4: Persistence of Bitcoin Discounts

Fiat Crypto

2.5

2.5
2

2
1.5

1.5
Density

Density
1

1
.5

.5
0

0
−.5 −.25 0 .25 .5 .75 1 −.5 −.25 0 .25 .5 .75 1
ar1 ar1

Notes: This figure plots the histograms of the autoregressive coefficients obtained by estimating AR(1) autoregressive models
on the bitcoin discounts for bitcoin-to-fiat (left panel) and bitcoin-to-crypto (right panel) currency pairs. Discounts are defined
according to equation (1) and denote the percentage difference in the number of bitcoins that one U.S. dollar can buy using
different currency pairs on different exchanges with respect to the average price. Data are daily from cryptocompare.com and
Thomson Reuters for the period 1/1/2014–7/11/2018.

Table 3: Average Statistics of Price Distribution

Currency Standard deviation 90-10 ratio 50-10 ratio 90-50 ratio Kurtosis Skewness
Fiat 0.050 1.079 1.029 1.049 28.114 -0.202
Crypto 0.042 1.040 1.024 1.016 77.522 0.609
All 0.047 1.063 1.026 1.036 41.155 -0.015

Notes: The table reports average statistics for the bitcoin discounts. The first row refers to bitcoin-to-fiat currency pairs. The
second row to bitcoin-to-crypto currency pairs. All statistics are volume weighted across currencies, exchanges, and days. Data
are from cryptocompare and Datastream for the period 1/1/2014–7/11/2018.

3.2 Deconstructing Bitcoin Discounts


Before presenting the results of the deconstruction of bitcoin discounts, it is convenient to
start with an example. First, we start by considering data for only for one randomly picked
day in our sample (i.e., Wednesday, June 20, 2018), and for a sample with no exchange rate
risk containing only the bitcoin-to-dollar currency pairs across different markets. In this
case, we have only 26 observations that correspond to bitcoin to U.S. dollars currency pairs
in 26 different exchanges. The standard deviation of bitcoin discounts is 1.7% and discounts
range from -6.6% to 0.9%. In the top left quadrant of figure 6 we plot the distribution of
these discounts. Second, we include all the bitcoin-to-fiat currency pairs on the same day.
We now obtain 109 observations. The standard deviation increases to 2.7% and bitcoin dis-

11
Figure 5: Distribution of Bitcoin Discounts

Fiat Crypto

25

25
20

20
15

15
Density

Density
10

10
5

5
0

0
−.8 −.4 0 .4 .8 −.8 −.4 0 .4 .8
Discount Discount

Notes: This figure shows the distribution of bitcoin discounts with respect to all bitcoin-fiat currency pairs (left panel) and all
bitcoin-crypto currency pairs (right panel) over the full length of the sample. The green curve denotes the kernel density. Data
are daily from cryptocompare.com and Thomson Reuters for the period 1/1/2014–7/11/2018.

counts range from -8.4% to 12.9%. Third, we include also all the bitcoin-to-crypto currency
pairs. We obtain 265 observations. The standard deviation now drops to 1.9% and bitcoin
discounts range from -8.1% to 13.2%. Finally, we consider the full length of the sample, from
January 1, 2014, to July 11, 2018. In this case, the standard deviation increases to 4.8%
and bitcoin discounts range from -75% to 87%. Note that in each step we calculate bitcoin
discounts using formula (1) and using the volume-weighted average price for the given set of
assets. The remaining quadrants of figure 6 plot the distribution of discounts for these last
three steps. This example illustrates how discounts are large, in a given day, for both fiat
and cryptocurrency pairs. However, the heterogeneity in price dispersion is primarily due
to the fact that price dispersion varies over time. In this section, we also explore an addi-
tional dimension of price dispersion with respect to the geographical location of the different
exchanges.
The documented large and highly dispersed discounts must depend on some frictions
and restrictions to trade that may have originated from two conceptually different sources.
First, there may exist heterogeneity in bitcoin prices across different countries where the
exchanges are located. For example, because of differences in regulation, transparency, and
capital controls. If so, bitcoin may have traded at different prices because some currency
pair was purchased in a relatively ”cheap” country and one in a relatively ”expensive”

12
Figure 6: Deconstructing Bitcoin Discounts: An Example

USD Fiat

40 60 80 100
20 40 60 80 100
Density

Density
20
0

0
−.8 −.4 0 .4 .8 −.8 −.4 0 .4 .8
Discount Discount

Fiat and Crypto Overall


40 60 80 100

40 60 80 100
Density

Density
20

20
0

0
−.8 −.4 0 .4 .8 −.8 −.4 0 .4 .8
Discount Discount

Notes: This figure shows the distribution of bitcoin discounts for different samples. The subplots ”USD”, ”Fiat” and ”Crypto”
correspond, respectively, to all the bitcoin to U.S dollar currency pairs, all the bitcoin-fiat currency pairs, and all the bitcoin -fiat
and -cryptocurrency pairs on Wednesday, June 201 2018. The subplot ”Overall” corresponds to all the currency pairs over the
full length of the sample. The data are daily from cryptocompare.com and Thomson Reuters for the period 1/1/2014–7/11/2018.

country. Second, there may exist heterogeneity in bitcoin prices corresponding to different
currency pairs traded within the same country. If so, bitcoin may have traded at different
prices because they were purchased in the same, for example, ”expensive” country but using
two different currency pairs. To formalize our decomposition of price dispersion, we follow
Kaplan and Menzio (2015) and introduce some additional notation. First, let µg,t denote the
volume-weighted average of the logarithm of the prices of all the assets traded in markets
located in geographical location g, for any currency j, at time t
P P
pm,j,t Qm,j,t
m∈Ωg j=j(m)
µg,t = P P (2)
Qm,j,t
m∈Ωg j=j(m)

where the notation m ∈ Ωg indicates all the markets m included in the set Ωg of the
markets located in the geographical location g, j = j(m) all the currency pairs traded in
market m, and pm,j,t = log Pm,j,t . Note that we use the broader definition of geographical
location, and not that of sovereign countries, to include in the same set exchanges located in
countries with the same, or similar, regulation (i.e., European countries). Specifically, after
direct inspection of each exchanges website, we assign each exchange to one of the following

13
Figure 7: Time-variation in the Standard Deviation of Bitcoin Discounts

.1
.08
Smoothed Std
.06
.04
.02

2014 2015 2016 2017 2018


day

Notes: This figure shows the distribution of bitcoin discounts with respect to all bitcoin-fiat currency pairs (left panel) and all
bitcoin-crypto currency pairs (right panel) over the full length of the sample. The green curve denotes the kernel density. Data
are daily from cryptocompare.com and Thomson Reuters for the period 1/1/2014–7/11/2018.

geographical locations: Australia, Brazil, Canada, Switzerland, Chile, China, Denmark,


European Union, the U.K., Hong Kong, India, Indonesia, Japan, Korea, Mexico, Poland,
Russia, Thailand, Ukraine, the U.S., Venezuela, and South Africa. Second, let µg,j,t denote
the volume-weighted average of the logarithm of the prices of the assets traded in markets
located in geographical location g and with currency j at time t
P
m∈Ωg pm,j,t Qm,j,t
µg,j,t = P (3)
m∈Ωg Qm,j,t
Third, let µt denote the volume-weighted average of the logarithm of the prices of all
assets traded in markets m and currency j
PP
pm,j,t Qm,j,t
m j
µt = PP (4)
Qm,j,t
m j

The data allow us to decompose the (log) bitcoin price for each asset into an aggregate
component (i.e., the volume-weighted average bitcoin price); a component related to the

14
geographical location of each exchange; and a currency component on top of the geographical
location component

log(1 + Dm,j,t ) ≡ pm,j,t − µt = (µg,t − µt ) + (µg,j,t − µg,t ) + (pm,j,t − µg,j,t ) (5)

where µt , µc,t , and µg,t are the volume-weighted average prices presented above. The left
hand side of equation (5) denotes the log bitcoin discount in market m, currency j and day
t. The first term on the right hand side of equation (5) denotes the exchange geographical
location effect; the second term denotes the currency effect on the top of the geographical
location effect; the last term denotes the residual component. We follow Kaplan and Menzio
(2015) and compute the total variance of the log discounts

Varm,j [dm,j,t ] = Varg [µg,t − µt ] + Varg,j [µg,j,t − µg,t ] + Varm,j [pm,j,t − µg,j,t ] + cov terms (6)

where dm,j,t = log(1 + Dm,j,t ), and the subscript of each variance term denotes the di-
mension over which the variance is calculated. For example, Varg denotes the variance with
respect to the mean discounts in different geographical locations, and Varg,j with respect to
the mean discounts in different geographical location and currency. Table 4 presents descrip-
tive statistics relative to the variance decomposition. The geographical location component
explains approximately 67% of the total variation; the currency component on top of the
geographical location approximately 18%; and the residual component approximately 15%.
Note that the share of variance explained by the covariance terms is negligible and that
the large differences between the minimum and maximum share values explained by each of
the three components indicate likely time-variation in the variance decomposition. Figure 8
plots the time-series for the three main components of the variance decomposition of bitcoin
discounts and indicates that, while the geographical location is the component that explains
the largest share of variance, there exist large time variation in the relative importance of
the three components.

4 Explaining Bitcoin Discounts


In this subsection, we attribute the variation in bitcoin discounts across different markets
and currencies to observable characteristics of the exchange locations, such as liquidity,
counter-party risk, global and local market conditions, and local market conditions. We
start by discussing a list of candidate determinants. We then estimate first time-series and
then panel regressions to investigate the contribution of these determinants to explain the

15
Table 4: Variance Decomposition of Bitcoin-to-Fiat Discounts

Mean Std. Dev. Min Max


Location 67 17.6 11 99
Currency 18 13.7 0 84
Covariance .000094 .00121 -0 0
Residual 15 13.9 0 71

Notes: The table reports results of the variance decomposition of bitcoin discounts following equation 6. The columns report, for
each component in 6, the mean share of explained variance, the standard deviation, minimum and maximum values. Numbers
are in percentages. The data are daily from cryptocompare.com and Thomson Reuters for the period 1/1/2014–7/11/2018.

Figure 8: Time-Series of the Variance Decomposition of Bitcoin-to-Fiat Discounts


1
.75
.5
.25
0

2014 2015 2016 2017 2018

Residual Currency
Location

Notes: The figure plots the time-series for the variance decomposition of bitcoin discounts following equation 6. We consider
three components: geographical location (red); currency (green); and residual (blue). To plot the figure we set the covariance
term to zero so that the sum of the components must be equal to 1 by construction. The data are daily from cryptocompare.com
and Thomson Reuters for the period 1/1/2014–7/11/2018.

variation in bitcoin discounts over time and across markets and currencies.

4.1 Candidate Determinants


We consider a large set of candidate determinants of bitcoin discounts. We start by describing
their construction and why they are potentially related to bitcoin discounts.

Counter-party risk Cryptoexchanges function in many ways like brokers, or banks. Cus-
tomers buy and sell bitcoins (or other cryptocurrencies), but typically maintain balances of
both fiat currencies and bitcoins on the exchange without retaining direct access to the cur-

16
rency (Gandal et al., 2017). Investors’ trades on an exchange are done off the blockchain.
When investors deposit bitcoins on an exchange, these are put in a shared account, called
a wallet, that the exchange controls (i.e., these bitcoins are like deposits for a bank). The
exchange keeps track of investors’ balances and of all the transactions. The blockchain only
records the information that investors have sent coins to the exchange and considers these
coins as owned by the exchange. When investors withdraw coins, then the blockchain is
informed and bitcoins are transferred to the investors’ personal wallets. Therefore, trading
bitcoin on exchanges is akin to buying IOUs and involves the risk that one party defaults
on the transaction. For example, when in February 2014 Mt. Gox, the largest exchange by
transaction volume at that time, declared bankruptcy, approximately 850,000 bitcoins be-
longing to customers were stolen (450 millions of U.S. dollars at the time). While Mt. Gox
failure is probably the most extreme example of counter-party risk after a security breach,
there are many more examples of temporary and permanent exchange shut-downs. Moore
and Christin (2013) find that by early 2013, 45% of Bitcoin exchanges had closed, and many
of the remaining markets were subject to frequent outages and security breaches. Vasek
and Moore (2015) investigate denial-of-service attacks against cryptocurrency exchanges
and document 58 such attacks. In table A2 in the appendix we provide a list of critical
issues involving some of the main cryptoexchanges. In order to capture counter-party risk,
we build three different measures. The first is based on the exchange bitcoin wallets. We
collect daily data on exchange wallets from walletexplorer.com and bitinfocharts.com. We
cannot cover all the exchanges in our sample, and in particular, we do not have data from
the Korean exchanges. Also note that wallets data are self-reported, and exchanges started
to identify their wallets only after the Mt. Gox bankruptcy. In part because of the uncertain
regulatory environment around cryptoexchanges, the size of the shared wallets is one of the
indicators that investors use to evaluate the reliability of different markets and the risk of
not being able to withdraw their balances. The second measure is based on a bankruptcy
indicator. We build a dummy variable that takes a value of 1 in the days when at least one
of the exchanges in our sample permanently shuts down. The third measure is based on
temporary shutdowns. Cryptomarkets are often subject to critical issues that lead to tem-
porary shutdowns. First, cybersecurity, i.e., thefts and distributed denial-of-service attacks
(DDoS)2 . Second, jam due to high user traffic. Third, software maintenance updates and
crashes. Fourth, uncertain regulatory environment. In the data, we define a DDoS attack
as a day in which daily volume is equal to zero. Note that our identification strategy is by
2
A standard denial-of-service attack (DoS attack) is a cyber-attack where the perpetrator seeks to make
a machine or network resource unavailable to its users by temporarily or indefinitely disrupting services of
a host connected to the Internet typically by flooding the service with requests. Instead, in a DDoS attack,
the traffic flooding originates from many sources.

17
construction imprecise. For example, if the attack starts in the middle of the day we could
observe non-zero volume for that day. Also, we label as ”DDoS attacks”, events that are
not necessarily linked to cybersecurity attacks (e.g., exchange inactive because of software
maintenance). In order to evaluate the effectiveness of this strategy, we manually verify that
our identification exactly captures a set of main critical events associated with the exchanges
in the sample and described in table A2 in the appendix. Figure 9 plots the daily fraction
of currency and exchange currency pairs that are inactive, for example, because of a DDoS
attack. The mean fraction of daily inactive assets is approximately equal to 17%, and the
maximum number of inactive assets is 50%. The figure also shows that the likelihood of a
temporary shut down declines over time. For example, the mean fraction is approximately
equal to 5% and the maximum 12% since 2017.

Figure 9: Fraction of Inactive Assets for DDoS attacks


.5
.4
Share of inactive assets
.2 .1
0 .3

2014 2015 2016 2017 2018

Notes: This figure plots the daily fraction of currency and exchange currency pairs that are inactive, for example as a consequence
of a DDoS attack. The definition of DDoS attack is specified in section 4. Data are daily from cryptocompare.com and Thomson
Reuters for the period 1/1/2014–7/11/2018.

Liquidity risk Liquidity risk is defined as the risk of being unable to liquidate a position
in a timely manner at a reasonable price. In order to capture liquidity risk, we build two
different measures. The first is based on bid-ask spreads. We collect daily bid-ask spreads
for a subsample of the bitcoin-to-fiat currency pairs. Large bid-ask spreads may explain
the persistence of deviation in bitcoin prices. The second is based on exchange turnover,
measured as the ratio between daily volume and wallet size measured in bitcoins.

Execution risk U.S. investors buying bitcoins across exchanges around the globe are
exposed to different forms of execution risk, i.e., the risk that a transaction is not executed

18
within the range of recent market prices observed by investors. In practice, completing
the trade requires some time both because of the time required to transfer bitcoins across
exchanges and because of the time required for the foreign currency transfer. We report
in table A3 in the appendix information on the approximate execution times for different
cryptocurrencies, but it is hard to exactly quantify these lengths of time, as they depend both
on the ”type” of investor and the state of the network. First, while retail investors would
typically need two business days for the foreign currency transfer, large investors could in
principle have agreements with foreign financial intermediaries to reduce this time. Second,
the proof-of-work, required by the blockchain to transfer bitcoins across exchanges, depends
on the solution of a computationally challenging problem which takes more time depending
on the traffic on the network. In order to capture execution risk, we collect data on the
median transaction confirmation time, i.e., the median time for a transaction to be accepted
into a mined block and added to the public ledger, from blockchain.com. Figure 10 plots
the time series for the median transaction confirmation time and shows that it was equal to
about 7.5 minutes at the beginning of the sample in 2014 and to about 8 minutes at the end
of the sample in July 2018, but reached high values of more than 20 minutes in 2017 when
the bitcoin price was at its peak.

Figure 10: Median Transaction Confirmation Time


30
25
20
15
10
5

2013 2014 2015 2016 2017 2018

Notes: This figure plots the daily median transaction confirmation time (in minutes). The median transaction confirmation
time measures the median time for a transaction to be accepted into a mined block and added to the public ledger. Data are
daily from blockchain.com for the period 1/1/2014–7/11/2018.

19
Market segmentation and local demand If markets are segmented, then local demand
and supply might drive bitcoin prices away from the average across all markets and curren-
cies. Market segmentation can depend, for example, on domestic regulation, like capital
controls. We proxy local demand with google trends data. Google trends data capture the
popularity of search queries in Google Search across various regions and languages. We
collect google trends data for the query ”bitcoin” across the different geographical locations
of the exchanges in the sample and build geographical indices. As an illustrative example,
in figure 11 we plot the bitcoin discounts on three Korean exchanges, the so-called Kim-
chi premium, together with the google trends index corresponding to searches of the word
”bitcoin” in Korea. The figure indicates that periods with large and negative discounts,
i.e., periods when buying bitcoins in Korean exchanges is more expensive relative to other
exchanges across the globe, are associated to a large increase in the google searches for the
word ”bitcoin”, i.e., our measure of local demand. Note that local supply could be proxied
with the number of miners in different locations. For example, data show that miners are
mostly concentrated in China, the U.S., Europe, and Russia. We have not been able to
collect detailed data on miners for the different locations yet, but we are in the process of
constructing this measure of local supply.

Figure 11: Kimchi Premium and Local Demand

Kimchi Premium and <<bitcoin>> Google searches


10 900
bithumb (krw)
coinone (krw)
5 korbit (krw)
800
google <<bitcoin>>

0
700

-5
600

-10
500
%

-15
400
-20

300
-25

200
-30

-35 100

-40 0
07/16 10/16 01/17 04/17 07/17 10/17 01/18 04/18 07/18 10/18

Notes: The figure plots daily U.S. dollars bitcoin prices on Kraken, Bithumb, Korbit along with the index for google trends
searches for the word ”bitcoin” in Korea. Bitcoin prices in Korean Won (KRW) are converted to U.S. dollars using the daily
spot exchange rate. Data are daily from cryptocompare.com, Thomson Reuters and Google Trends, for the period 9/1/2017–
7/11/2018.

20
Cryptocurrency competition Bitcoin was the first cryptocurrency and to this day is the
most popular cryptocurrency by volume of transactions and market capitalization. However,
over time, many more cryptocurrencies were issued and started to compete with bitcoin.
Ethereum, released in July 2015, and Ripple, released in September 2013, are the main com-
petitors in terms of market capitalization and volume. To capture cryptocurrency competi-
tion, we construct an index based on the ratio between the volume of the bitcoin-to-ethereum
currency pairs relative to all currency pairs. We label this index ”ETH Importance”.

4.2 Time-series Regressions

In section 3 we discussed the time-series properties of the variability of bitcoin discounts.


For example, figure 7 shows the large time-variation in the daily standard deviation of
bitcoin discounts across all exchange and currency pairs. In this section we perform a
more formal empirical analysis of the time-variation of the dispersion in bitcoin discounts.
For each day t, we compute the cross-sectional standard deviations of bitcoin discounts
across all assets. Table 5 reports the results of time-series OLS regressions which include
the explanatory variables described in section 4. Specifically, we consider the following
regressors: the log change of the bitcoin price (BTC Price); the share of exchanges that
are temporarily shut-down (DDoS); the mean bid-ask spread (BidAsk); the cross-sectional
standard deviation of the turnover (StD Turnover); the cross-sectional standard deviation of
the bid-ask spreads (StD BidAsk); the wallet size (Wallet); the mean google trends indicator
(Google); the volume of the bitcoin-to-ethereum currency pair relative to all currency pairs
(ETH Importance); the median transaction confirmation time (Latency); and the lag of
the dependent variable (Persistence). We estimate the regressions at both daily (first two
columns) and weekly frequency (third and fourth columns). Our results can be summarized
as follows. First, if we exclude the dependent variables, our explanatory variables explain
approximately 24%, at daily frequency, and 37%, at weekly frequency, of the total variation in
the volatility of bitcoin discounts. Variability in bitcoin discounts tend to be lower the higher
share of exchanges that are temporarily shut-down; the lower the volume of transactions;
the higher the standard deviation in turnover; the higher the wallet size; the lower the value
for the google trends indicator that captures the global popularity of bitcoins; and the lower
the network congestion, measured by the median transaction confirmation time. When we
include the lag of the dependent variables in the regressions, R2 increase to 50% and 59%
at daily and weekly frequency respectively. The ”persistence” coefficient is positive and
highly significant. Most of the coefficients do not change sign, but t-stats are lower. At
daily frequency, only the bankruptcy indicator, the volume of transactions, the standard

21
deviation of turnover, and the median transaction confirmation time remain significantly
different from zero for standard confidence levels. At weekly frequency, volume and the
google trends indicator are the only variables with a significant effect.

Table 5: Time-series Regression: Bitcoin-to-Fiat

Daily Daily Weekly Weekly


BTC Price -0.00398 -0.00909* -0.000815 0.00120
(-1.07) (-1.84) (-0.34) (0.58)
DDoS -0.00619*** -0.00247 -0.00388 -0.00206
(-3.99) (-1.30) (-1.65) (-0.88)
Bankrupt -0.000350 -0.000520* -0.000919 -0.000653
(-0.70) (-1.81) (-0.60) (-0.50)
Volume 42.15*** 14.94*** 49.57*** 22.48***
(9.90) (3.45) (6.10) (3.57)
BidAsk 0.00104 0.00000170 0.00107 0.000715
(1.55) (0.00) (0.85) (0.56)
StD BidAsk -0.000299 0.0000368 -0.000447 -0.000357
(-1.52) (0.20) (-0.91) (-0.80)
StD Turnover -1.73e-15*** -1.98e-15** -2.57e-15** -1.12e-15
(-2.60) (-2.06) (-2.08) (-0.70)
Wallet -6.030** -3.929 -3.336 -1.386
(-2.53) (-1.45) (-0.88) (-0.45)
Google 6.066*** 2.156 7.299*** 4.037**
(5.08) (1.62) (3.51) (2.19)
ETH Importance 0.00206 -0.000861 0.00217 0.000185
(1.14) (-0.71) (0.53) (0.06)
Latency 0.000128*** 0.0000545* 0.000207*** 0.0000610
(4.47) (1.96) (3.19) (1.12)
Persistence 0.642*** 0.586***
(8.07) (6.36)
Obs. 917 733 183 183
R-sqr. 0.237 0.503 0.365 0.590
t statistics in parentheses
* p < 0.10, ** p < 0.05, *** p < 0.010

Notes: The table reports the results of time-series regressions of the cross-sectional standard deviation of bitcoin discounts.
The regressors are: the log change in the bitcoin price; the share of exchanges that are closed because of a DDoS attacks;
a dummy variable indicating exchange bankruptcy; the mean bid-ask spread; the cross-sectional standard deviation of the
turnover, measured as share of bitcoin trading volume to wallet; the cross-sectional standard deviation of bid-ask spreads; the
mean bitcoin wallet; a variable capturing the volume of the bitcoin-to-ethereum currency pairs relative to total bitcoin volume;
the median transaction confirmation time; the lag of the dependent variable. Section 3.2 contains additional details on all the
regressors. The first two columns report results of regressions on daily frequency data. The third and fourth columns report
results of regressions on weekly frequency data. Robust standard errors are reported in parenthesis. The original data are daily
from cryptocompare.com and Thomson Reuters for the period 1/1/2014–7/11/2018.

4.3 Panel Regressions


The time-series estimates show that the variability in bitcoin discounts has a persistent com-
ponent, and that liquidity (i.e., volume and turnover), local market demand (i.e., google
trends indicator), counter-party risk (DDoS and bankrupt indicator), and network conges-

22
tion (latency) have a significant effect. In this section, we consider daily frequency panel
estimates where the dependent variables are the squared bitcoin discounts for each asset. Our
explanatory variables come from different sources and are different in terms of sample length
and coverage of assets. For example, if we include all the explanatory variables presented in
table 6, we are left with only 27 assets and 8,222 observations, i.e., only 20% of the original
sample. We report results of panel estimations including different set of regressors in the
columns of table 6. In the last two rows of the table we report the number of assets and total
number of observations for each specification. We start by considering a set of explanatory
variables common to all assets in order to maximize the number of assets and observations.
Specifically, in the model (1) we consider the log change of the bitcoin price (BTC Price);
the share of exchanges that are temporarily shut-down (DDoS); the bankruptcy indicator
(Bankrupt); the median transaction confirmation time (Latency) and include an asset fixed
effect and the lag of the dependent variable. We find that the squared discounts are larger
the lower is the value for the bankruptcy indicator and the higher the latency indicator that
measures the congestion of the network. In model (2) and (3) we add additional explanatory
variables that are exchange specific and have a smaller coverage: the volume of transactions,
the wallet size, the google trends indicator, the indicator capturing the relative importance
of ethereum, and the bid-ask spread. Also for model (2) and (3) we include an asset fixed
effect and the lag of the dependent variable. We find that higher counter-party risk (i.e.,
DDoS and bankruptcy), higher exchange wallet size, higher local demand measured by the
google trends indicator, and higher bid-ask spread are associated to larger squared bitcoin
discounts. In models (4) and (5) we replace the first set of regressors, common for all assets,
with a day fixed effect (model (4)) and an asset and country-week fixed effects (model (5)).
In this case, we find that higher squared bitcoin discounts are associated to higher bid-ask
spreads and higher relative importance of ethereum. Finally, note that our panel results
confirm the high persistence of bitcoin discounts. We find that the persistence coefficient is
substantially reduced if we control for a country-week fixed effect.

5 Conclusions
In this paper, we document persistent and mean-reverting deviations of bitcoin prices across
different exchanges and currency pairs around the globe. The dispersion of bitcoin prices
is an order of magnitude larger than the the dispersion typically observed for other assets,
like for ADRs or for deviations of the covered interest parity, and it is on par with the
price dispersion observed in the good markets. We find that the bitcoin price dispersion
varies significantly over time and is linked to the fluctuations of variables capturing the

23
Table 6: Panel Regression: Bitcoin-to-Fiat

(1) (2) (3) (4) (5)


Persistence 0.799*** 0.895*** 0.599*** 0.596*** 0.274**
(10.82) (70.90) (3.94) (3.90) (2.64)
BTC Price 0.00777 0.0178 -0.000747
(0.83) (1.25) (-0.38)
DDoS -0.000506 0.000255 -0.00155**
(-0.40) (0.11) (-2.08)
Bankrupt -0.000265* -0.000362 -0.000370**
(-1.84) (-1.58) (-2.07)
Latency 0.0000384** 0.0000409 0.00000421
(2.45) (1.39) (0.56)
Volume 5.611* 2.670* -12.20* 1.188
(1.74) (1.72) (-2.02) (0.68)
Wallet -0.857 -0.717** 0.398 -0.154
(-1.13) (-2.63) (1.35) (-0.79)
Google -0.596 1.363* 1.576
(-0.72) (1.85) (1.41)
ETH importance 6.99e-10 1.16e-10 -2.95e-10 3.84e-10***
(0.90) (0.78) (-0.55) (3.88)
BidAsk 0.000142* 0.0000827 0.000253**
(1.86) (1.15) (2.11)
Asset FE X X X X X
Day FE X
CountryWeek FE X
R-sqr. 0.647 0.832 0.445 0.545 0.637
N assets 144 54 27 27 27
N Obs. 44282 16795 8222 8227 8227
t statistics in parentheses
* p < 0.10, ** p < 0.05, *** p < 0.010

Notes: The table reports the results of panel regressions of the cross-sectional standard deviation of bitcoin discounts. The set
of regressors considered includes: the log change in the bitcoin price; the share of exchanges that are closed because of a DDoS
attacks; a dummy variable indicating exchange bankruptcy; the mean bid-ask spread; the cross-sectional standard deviation of
the turnover, measured as share of bitcoin trading volume to wallet; the cross-sectional standard deviation of bid-ask spreads;
the mean bitcoin wallet; a variable capturing the volume of the bitcoin-to-ethereum currency pairs relative to total bitcoin
volume; the medium confirmation time; the lag of the dependent variable. Section 3.2 contains additional details on all the
regressors. HC standard errors are reported in parenthesis. The original data are daily from cryptocompare.com and Thomson
Reuters for the period 1/1/2014–7/11/2018.

24
popularity of bitcoin and counter-party risk in cryptomarkets. We also find that factors
related to the location of the different exchanges and their liquidity explain the bitcoin
discounts variability. However, we also find important exceptions. For examples, exchanges
based in Asia are the largest in term of trading volume and typically very liquid, but also
show the largest price deviations. An interesting avenue for future research is the exploration
of distinct features of bitcoin markets in terms of clienteles, like buyers (i.e., retail as opposed
to large investors) and sellers (i.e., miners). For example, in 2018 the Korean and Japanese
exchanges generate approximately 60% of all trading volume in bitcoins. However, miners
are mostly concentrated in China, the U.S., Europe, and Russia.

25
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28
Appendix

A Data

Commonly used data sources in finance do not have the bitcoin data coverage we use in
this paper. For example, at the time we write this paper, Bloomberg offers Bitcoin–U.S.
dollar quotes only from Bitfinex, BitStamp, CoinBase, Bitflyer, ItBit, and Kraken, and does
not provide quotes for all the fiat-crypto pairs we use. In addition, Bloomberg does not
offer data on the volume. For this paper, we download daily data on bitcoin prices and
volume for different markets from the cryptoexchange aggregator cryptocompare.com us-
ing a Python script3 . Note that all cryptoexchanges give users public access to data on
prices, order books, and trading volume. Users can access the data either using an appli-
cation programming interface (API) or a WebSocket. However, in order to download data
directly from individual exchanges, exchange-specific scripts to scrap the data are required.
On the contrary, cryptocompare.com offers the opportunity of bulk download of data from
different exchanges. We download data on all the bitcoin-fiat pairs that were listed on
https://www.cryptocompare.com/exchanges/#/overview at the end of February 2018, and
we manually check, using each exchange website, the number of currency pairs that are
traded.
Table A1 reports a list of the top exchanges by trading volume as for January 2018. The
third column reports the total number of currency pairs that can be traded, which is as
large as 409 for HitBTC, an exchange on which only cryptocurrencies are traded. The table
also reports the U.S. dollar price of 1 Bitcoin in all exchanges; the daily trading volume
(in U.S. dollar billions); and the exchange launch dates. The exchange with the largest
trading volume is Binance, an exchange in which only cryptocurrency pairs are traded. The
second largest exchange is Bithumb, a Korean exchange, where investors can trade Korean
Won (KRW) for several cryptocurrencies. The largest U.S. dollar-based exchange is Bitfinex,
where investors can use U.S. dollars and Euros to buy several cryptocurrencies.
Table A2 reports a list of the main critical issues that cryptomarkets faced since 2014
that we manually collected using various sources. Most of the events are associated with
thefts of bitcoins. For these events, in the third and fourth columns, we report the amount
of bitcoin stolen both in units of bitcoins and in millions of U.S. dollars. For each event, we
also report the date corresponding to the first day of suspension of service as well as, when
available, the date in which the exchanges resumed operations. The last columns report the
final outcome of the attack. Most exchanges are still active and have resumed operations,
with the exceptions of Mt. Gox and Youbit who permanently shut down after declaring
bankruptcy.

3
Specifically, we use API and send organic, grass-fed HTTP/1.1 requests to cryptocompare.com. Note
that this is a standard package in Python distributions.

29
Table A1: Top Crypto Exchanges
# Name Currency Number of Price Trading volume Launch
type currency pairs BTC in USD in bln USD (24h) Date
1 Binance crypto only 247 $10,979.60 $2.65
2 Bithumb crypto, KRW 12 $12,076.70 $2.32 10-Sep-13
3 Upbit crypto only 214 $12,051.40 $2.07 24-Oct-17
4 Okex crypto only 410 $10,921.10 $1.99
5 Bitfinex crypto, USD, EUR 85 $10,931.00 $1.62 8-Jun-13
6 Huobi crypto only 145 $10,944.70 $1.27
7 Bittrex crypto only 270 $10,937.80 $0.59
8 Kraken crypto, EUR, USD, JPY 45 $11,042.20 $0.57 10-Sep-13
9 GDAX crypto, USD, EUR, GBR 12 $10,916.00 $0.57 25-Jan-15
10 HitBTC crypto only 409 $10,684.80 $0.48
Notes: This table reports the list of the top crypto exchanges by trading volume. Data are collected on January 24, 2018,
from https://coinmarketcap.com/. The number of pairs refers to the total number of currency pairs (fiat and crypto) traded
on each exchange. The trading volume is in U.S. dollar billions and is annualized.

Table A2: Critical Issues

Name btc USD mln suspended resume outcome


1 Mt Gox 850000 500 7-Feb-14 24-Feb-14 bankruptcy
2 NiceHash 4700 75 7-Dec-17 20-Dec-17 active
3 Bitfinex 120000 65 2-Aug-16 active
4 Parity 32 19-Jul-17 active
5 Tether 31 21-Nov-17 active
6 Bitstamp 19000 5 5-Jan-15 9-Jan-15 active
7 Youbit 4000 5 28-Apr-17 active
8 Youbit 1000 2 19-Nov-17 bankruptcy
9 Coincheck 523 mil NEM 534.8 28-Jan-18 active
1 Parity locked funds, 513,774.16 ETH 160.8 7-Nov-17 active
2 Bitstamp down 12-Feb-14 14-Feb-14 active
3 Kraken down 10-Jan-18 12-Jan-18 active
Notes: The table reports a selected sample of critical issues on the major cryptocurrencies exchanges. The second and third
columns report, in units of currency and US dollars respectively, either the number of bitcoins or other cryptocurrencies
stolen, locked or unavailable due to software maintenance or a DDoS attack. Data are manually collected by the authors from
different sources.

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B Execution times and transaction costs

Cryptocurrencies differ in terms of their execution times and transaction costs. Table A3
reports the approximate times for transactions in different cryptocurrencies and for the
credit card provider Visa as a reference. The time estimates assume that the transaction is
confirmed in the first block after being submitted and are approximate because they depend
on the network congestion. For bitcoin, the maximum number of transactions per second is
7, with an estimated execution time of one hour. Both Ethereum and Ripple allow a larger
number of transactions per second (respectively, 20 and 1,500) and a shorter execution time
(respectively, 6 minutes and near-instant execution). The credit card provider Visa allows
for a significantly larger number of transactions per second, but also has larger transaction
costs than cryptocurrencies.

Table A3: Cryptocurrencies by Execution Time

Max Transactions Estimated Transaction Transaction


per second Execution Time fee in crypto fee in $
Bitcoin (BTC) 7 60 Minutes 0.001 11.29
Etherum (ETH) 20 6 Minutes 0.005 5.18
Ripple (XRP) 1,500 Near-instant 0.02 0.03
Visa 24,000 Near-instant 1.4–2.4%
Notes: We report approximate executions times for transactions in different cryptocurrencies. Execution times can vary
depending on the conditions of the network. The time estimates assume that the transaction is confirmed in the first block
after being submitted. Dollar fees depend on crypto-US% exchange rate and are for January 2018. Data are manually collected
by authors from different sources.

In table A4 we report, for all of the exchanges in our sample, information on the fees
charged to investors. The second and third columns report, in percentage, the ”taker” and
”maker” trading fees. Taker fees are paid when investors remove liquidity from the order
book by placing an order that is executed against an order on the order book. On the
contrary, maker fees are paid when investors add liquidity to the order book of the exchange
by placing a limit order below the ticker price for buy, and above the ticker price for sale.
Typically, taker trading fees are equal to or larger than marker trading fees. The fourth and
fifth columns report, respectively, the withdrawal fees that investors pay when they withdraw
bitcoins and fiat currencies. Most exchanges charge higher withdrawal fees when investors
withdraw fiat currencies, rather than bitcoins. Withdrawal fees for fiat currencies are usually
lump sums, but some exchanges charge fees proportional to the size of the transaction. Note
that the numbers reported on table A4 are for January 2018 and are manually collected by
the authors from the exchange websites. Therefore, it is safe to assume that they represent
the fees paid by retail investors. Large investors are, instead, likely to pay smaller fees.

31
C Transaction costs
Most exchanges charge investors trading fees that are proportional to the size of the trans-
actions. Typically, exchanges do not charge investors when they deposit crypto or fiat
currencies, but they do charge lumps sum fees in case of withdrawals. It is convenient to
consider a simple example to understand all the fees that a U.S. investor could in theory
face. Figure A1 considers the case of a U.S. investor that first trade on Bithumb, one of the
Korean exchanges, and then on Kraken, our benchmark exchange. First, the investor could
have to pay a deposit fee to deposit Korean Won on Bithumb. In practice, exchanges do not
charge deposit fees. Second, the investor must pay a trading fee when she exchanges Ko-
rean Won for Bitcoin. Third, the investor must transfer Bitcoins from Bithumb to Kraken.
At this stage, she must pay a miner’s fee to the node in the network that first validates
the transaction on the blockchain. Fourth, she could have to pay a new deposit fee when
depositing Bitcoins on Kraken. Fifth, she must pay a trading fee to exchange Bitcoins for
U.S. dollars. Sixth, she must pay a withdrawal fee to take her U.S. dollar balance outside
Bitfinex. This complex sequence of fees clearly reduces the net returns to the investor.

Figure A1: Trasaction Costs for U.S. Investor

KRW-US$ KRW-BTC Bithumb-Kraken US$-BTC


US$ KRW BTC BTC US$
Spot FX Bithumb Kraken

deposit fee miner fee deposit fee withdrawal fee


trading fee trading fee

Notes: This figure describes the transaction costs that a U.S. investor faces to conclude a bitcoin transaction that goes through
Bithumb and Kraken. We assume that the U.S. investor first convert dollars for Korean Won (KRW) on the spot market. Then,
she buys bitcoins on Bithumb and transfer them immediately to Kraken. Finally, she converts bitcoins to dollars on Kraken
and then withdraws her dollar balance.

D Explaining Bitcoin Discounts

32
Table A4: Investing in Bitcoin: Transaction Costs

Exchange Trading fee (taker,%) trading fee (maker,%) withdrawal (in btc/10,000) withdrawal (in fiat) units withdrawal (in fiat)
abucoins 0.25 0.00 10.00 0.00 PLN
binance 0.10 0.10 – –
bit2c 0.50 0.50 10.00 60.00 NIS
bitbank 0.00 0.00 10.00 540.00 JPY
bitbay 0.43 0.43 – –
bitfinex 0.20 0.10 8.00 0.10 %
bitflip 0.18 0.10 10.00 0.01
bitflyer 0.15 0.15 8.00 432.00 JPY
bithumb 0.15 0.15 15.00 1000.00 KRW
bitmarket 0.45 0.15 8.00 2.00 EUR
bitso 1.00 0.10 – –
bitstamp 0.25 0.25 0.00 0.90 EUR
bittrex 0.25 0.25 – –
btcc 0.10 0.10 15.00 0.30 %
btce 0.20 0.20 – –
btcmarkets 0.85 0.85 5.00 0.00 AUD
bxinth 0.10 0.10 5.00 0.20 %
ccedk 0.20 0.20 10.00 25.00 DKK
ccex 0.20 0.20 – –
coinbase 1.49 1.00 – –
coincheck 0.15 0.05 5.00 400.00 JPY
coinfloor 0.30 0.30 5.00 1.50 EUR
coinone 0.10 0.10 15.00 1000.00 KRW
coinroom 0.25 0.06 10.00 0.00 PLN
cryptopia 0.20 0.20 – –
exmo 0.20 0.20 10.00 2000.00 RUB
gatecoin 0.35 0.25 – –
gateio 0.20 0.20 10.00 –
gemini 0.25 0.25 0.00 0.00 USD
hitbtc 0.10 0.10 – –
huobipro 0.20 0.20 10.00 –
itbit 0.20 0.00 – –
korbit 0.20 0.08 10.00 1000.00 KRW
kraken 0.26 0.16 10.00 0.90 EUR
kucoin 0.10 0.10 10.00 –
lakebtc 0.20 0.15 10.00 0.10 %
liqui 0.00 0.00 10.00 –
livecoin 0.18 0.18 10.00 3.00 %
luno 0.20 0.00 – –
lykke 0.14 0.09 5.00 50.00 CHF
mercadobitcoin 0.70 0.30 10.00 1.99 %
okcoin 0.20 0.20 10.00 0.10 %
okex 0.20 0.15 10.00 –
paymium 0.59 0.59 10.00 20.00 EUR
poloniex 0.25 0.15 – –
quadrigacx 0.50 0.50 10.00 1.00 %
quoine 0.25 0.25 10.00 –
therocktrading 0.20 0.20 – –
tidex 0.10 0.10 10.00 –
unocoin 0.70 0.70 9.00 –
yobit 0.20 0.20 5.00 4.00 %
yunbi 0.05 0.05 20.00 0.10 %
zaif 0.00 0.00 10.00 486.00 JPY
yobit 0.20 0.20 5.00 4.00 %
yunbi 0.05 0.05 20.00 0.10 %
zaif 0.00 0.00 10.00 486.00 JPY
M ean 0.27 0.20 9.36
M edian 0.20 0.16 10.00
33
Notes: Manually collected by the authors directly from the exchanges websites on March, 2018. Trading fees are always in
percentage. Withdrawal fees are fixed for most exchanges, and the last column specifies the units.
Table A5: Time-series Regression: Bitcoin-to-Crypto

Daily Daily Weekly Weekly


BTC Price 0.00683 0.0139 0.00758* 0.00753*
(0.79) (1.23) (1.71) (1.66)
DDoS 0.0212*** 0.0246*** 0.0303*** 0.0297***
(2.86) (2.69) (3.09) (2.86)
Bankrupt 0.000330 0.000222 -0.00241 -0.00238
(0.30) (0.21) (-0.67) (-0.66)
Volume -345.4*** -302.4** -449.3** -443.3**
(-2.78) (-2.09) (-2.17) (-2.04)
StD Turnover -1.81e-13 -2.61e-13** 1.26e-13 1.17e-13
(-1.33) (-2.17) (0.23) (0.22)
Wallet -12.03** -9.915* -3.014 -2.995
(-2.55) (-1.74) (-0.45) (-0.45)
Google 0.808 1.781 1.342 1.296
(0.40) (0.78) (0.48) (0.47)
ETH Importance 0.00614 0.00624 0.0118** 0.0117**
(1.61) (1.35) (2.11) (2.07)
Latency 0.000113 0.000124 0.000116 0.000112
(1.05) (0.96) (0.88) (0.86)
Persistence 0.0414 0.0153
(1.00) (0.17)
Obs. 900 720 180 180
R-sqr. 0.0522 0.0597 0.222 0.222
t statistics in parentheses
* p < 0.10, ** p < 0.05, *** p < 0.010

Notes: The table reports the results of time-series regressions of the cross-sectional standard deviation of bitcoin discounts.
The regressors are: the log change in the bitcoin price; the share of exchanges that are closed because of a DDoS attacks;
a dummy variable indicating exchange bankruptcy; the mean bid-ask spread; the cross-sectional standard deviation of the
turnover, measured as share of bitcoin trading volume to wallet; the cross-sectional standard deviation of bid-ask spreads; the
mean bitcoin wallet; a variable capturing the volume of the bitcoin-to-ethereum currency pairs relative to total bitcoin volume;
the medium confirmation time; the lag of the dependent variable. Section 3.2 contains additional details on all the regressors.
The first two columns report results of regressions on daily frequency data. The third and fourth columns report results of
regressions on weekly frequency data. Robust standard errors are reported in parenthesis. The original data are daily from
cryptocompare.com and Thomson Reuters for the period 1/1/2014–7/11/2018.

34
Table A6: Panel Regression: Bitcoin-to-Crypto

(1) (2) (3) (4) (5)


Persistence 0.539** 0.696* 0.696* 0.712* 0.684
(2.08) (1.92) (1.92) (1.93) (1.52)
BTC Price 0.0426** 0.0599* 0.0599*
(2.14) (1.72) (1.72)
DDoS 0.00537 0.000326 0.000326
(0.88) (0.04) (0.04)
Bankrupt -0.000963* -0.00229 -0.00229
(-1.94) (-1.56) (-1.56)
Latency 0.0000555** 0.0000260 0.0000260
(2.03) (0.50) (0.50)
Volume -59.73 -59.73 -73.08 -62.21
(-1.16) (-1.16) (-1.23) (-1.32)
Wallet -0.128 -0.128 1.012 0.0298
(-0.09) (-0.09) (0.89) (0.05)
Google -0.685 -0.685 -0.967 3.246
(-0.95) (-0.95) (-0.18) (1.57)
voleETH 4.74e-09 4.74e-09 6.84e-10 1.33e-09
(1.67) (1.67) (0.54) (1.36)
Asset FE X X X X X
Day FE X X X
CountryWeek FE X
R-sqr. 0.224 0.321 0.321 0.345 0.393
N assets 162 59 59 59 59
N Obs. 32412 14139 14139 14139 14139
t statistics in parentheses
* p¡0.10, ** p¡0.05, *** p¡0.010

Notes: The table reports the results of panel regressions of the cross-sectional standard deviation of bitcoin discounts. The
regressors are: the log change in the bitcoin price; the share of exchanges that are closed because of a DDoS attacks; a dummy
variable indicating exchange bankruptcy; the mean bid-ask spread; the cross-sectional standard deviation of the turnover,
measured as share of bitcoin trading volume to wallet; the cross-sectional standard deviation of bid-ask spreads; the mean
bitcoin wallet; a variable capturing the volume of the bitcoin-to-ethereum currency pairs relative to total bitcoin volume; the
medium confirmation time; the lag of the dependent variable. Section 3.2 contains additional details on all the regressors.
The first two columns report results of regressions on daily frequency data. The third and fourth columns report results of
regressions on weekly frequency data. Robust standard errors are reported in parenthesis. The original data are daily from
cryptocompare.com and Thomson Reuters for the period 1/1/2014–7/11/2018.

35