From the standpoint of investors, the cornerstone of the virtual currency market is its volatility. With price fluctuations at every corner, arbitrage-savvy investors would consider the cryptocurrency market a paradise. However, a recent report from Bitwise suggests otherwise.
The report presented to the SEC by the crypto-centric investment firm, Bitwise Asset Management, captured the arbitrage in the Bitcoin [BTC] market over the past 18 months. However, the crux of the research was the difference between actual volume and reported volume, which recorded a deviation of a whopping 95 percent.
It must be noted that the “arbitrage” in question refers to the variance in Bitcoin prices on exchanges, including Binance, Bitfinex, Kraken, Bitstamp, Coinbase, BitFlyer, Gemini, itBit, Bittrex, and Poloniex. This is because these exchanges pose “actual volume”, according to a prior study done by Bitwise.
Looking at the monthly average price deviation based on the price listed by the ten aforementioned exchanges, a consistent decline was seen in 2018. The price deviation in December 2017, when the Bitcoin bull-run began, was over 0.7 percent and since then, the deviation has not crossed 0.5 percent.
January 2018 saw the highest deviation in 2018, accounting for over 0.45 percent, which soon fell to under 0.1 percent by July. As the market went into a freefall after the Bitcoin Cash [BCH] hardfork, the deviation increased to over 0.15 percent. February 2019 saw the lowest deviation in over 15 months when a deviation of 0.05 percent was recorded.
Additionally, the average spread of the 10 exchanges varied from Coinbase Pro’s $0.01 to Bitfiniex’s $0.10, indicative of the accurate tracking between exchanges and small margin for arbitrage trading.
Bitwise cited three main reasons for the consistency in BTC prices across major exchanges. The primary reason was the launch of futures contracts by the Chicago Board Options Exchange [CBOE] and the Chicago Mercantile Exchange [CME] in December 2017. The report stated,
“[Bitcoin Futures] fundamentally transformed the bitcoin market, creating a two-sided market and easy hedging for the first time.”
The secondary reason was the surge in institutional interest, which Bitwise refers to as “institutional market makers.” Jane Street Capital, a trading firm was named by the report as a “leading market maker” entering the crypto-trading business in March 2018.
In July 2018, Europe’s largest ETF marker maker, Flow Trader, began making markets with the Swedish Bitcoin ETN. In the following months, several market makers followed Flow Traders’ lead and ventured into the crypto market. The report added,
“By summer 2018, most major market makers were either present in the bitcoin market or actively exploring the space.”
Cryptocurrency lending at the institutional level also provided immense impetus to the flattening of the arbitrage level, stated the third reason. Prior to the crypto-boom of December 2017, “modest lending” did take place but after the surge, the crypto-lending industry skyrocketed.
Bitwise cited the success of Galaxy Global Trading, a cryptocurrency lending platform, which processed over $1.11 billion in borrowings and lending in 2018 alone, with around 60 percent owing to Bitcoin [BTC]. According to the final quarterly report from the company, despite the decline in Bitcoin’s price, its loan records surged to $153 million active loans, a massive 15 percent increase from the previous quarter.
Based on the three factors presented above, the report suggests that the efficiency of the overall market in 2018 has seen a significant boost. This has allowed both retail investors and institutional investors to establish a commensurate foothold in the market. The investment firm hails this period as being a “dynamic, institutional-quality, two-sided market for the first time.”
“While future developments, including the proposed launch of a U.S. ETF, may be incrementally beneficial to the market, the spot bitcoin market today operates with an efficiency that matches or exceeds that of other major markets.”
Other findings of the report pointed out that the degree of difference between the Bitcoin Futures market and the Bitcoin Spot market is not as far apart as one might imagine. If adjusted rather than touted trading volume being taken into account, the BTC Futures expressed as a percentage to their Spot equivalent rises from 1.51 percent to over 33 percent.
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