Bitcoin arbitrage and unofficial exchange rates

Gina Pieters∗

Trinity UniversitySofia Vivanco

Trinity University

January 19, 2015

Abstract

We compare the implied bitcoin exchange rates between 18 currencies and theUS dollar to official spot exchange rates, and find that they can vary greatly. Weshow that this difference can be partially explained by government intervention inthe official markets. This implies that the bitcoin exchange rate can be used toevaluate the accuracy of the official exchange rate data, and provides a method toapproximate the time trend of the black market exchange rate if such data is notavailable.

JEL Codes: F31, F33, G15

1 IntroductionWe examine whether bitcoin facilitated exchange rates allow for arbitrage with officialexchange rates, and in doing so provide the first systematic analysis of the bitcoin mar-ket. Theoretically – as bitcoin provides an easily accessible spot market for currencyswaps – one would expect that the bitcoin exchange rate and the official spot exchangerate should be similar, or else they would provide an easy opportunity for profit.1 Itshould be noted that– unlike any paper that studies arbitrage in exchange rate markets,for example Akram et al. (2008) – we are comparing spot exchange rates across mar-kets in the same moment of time, and not comparing exchange rates constructed fromcontracts of different length. This simultaneity means arbitrage opportunities in thebitcoin markets should be easily found by anyone, and are therefore less likely to exist.

We observe that this theory fails to various degree across exchanges. This failureis particularly interesting as, unlike many other global financial exchanges (such as theNew York Stock Exchange), bitcoin exchanges operate 24/7, their up-to-date pricingdata is freely available, and the exchanges are easily accessible by any individual witha computer: it therefore has amongst the lowest entry costs of any financial market.

We show that part of this failure can be explained the presence of an active blackmarket for foreign currency, and hence, a relevant black market exchange rate. We

∗Contact Author. Email: gpieters@trinity.edu1We use currency to refer exclusively to a currency issued by the central monetary authority, for example

the US dollar, as opposed to crypto-currencies such as bitcoin.

1

document a relationship between the black market and the bitcoin exchange rate. Thisrelationship allows researchers to use the bitcoin exchange rate to evaluate the accu-racy of official exchange rate data, or to approximate the behaviour of the black marketexchange rate if the data is unavailable. There is a need for this: it was shown inBahmani-Oskoee and Tankui (2008) that in tests of purchasing power parity (PPP) the-ory the adjustment speed is faster when using black market exchange rate compared tothe official exchange rate, implying that black market exchange rates should be consid-ered in PPP tests. Typically, the lack of availability of black market data would makethis prescription impossible to follow. It could also allow for the analysis of the realexchange rate, as was done in Wada (2012), for countries in which this is typically notpossible.

2 What are Bitcoins?Bitcoin is an online medium of exchange without the presence of a central monetaryauthority. Every Bitcoin consists of a long string containing combinations of numbersand letters that uniquely identifies itself within the bitcoin economy. Bitcoins are math-ematically generated, and the process of numerically solving these algorithms is knownas mining. Miners compete to earn bitcoins by solving increasingly complex mathe-matical problems using increasingly powerful computers. To date, approximately 13.4million of bitcoins are circulating in the global economy.

The most common method to purchase bitcoins is through a bitcoin trading site(exchange). Once an account has been created and activated on an exchange, users aregranted a wallet in which they can store currencies and bitcoins. A wallet is associatedwith a particular exchange, so a user must transfer bitcoins or currencies between wal-lets to use their bitcoins on a different exchange. Once obtained, bitcoins can be soldfor currency, used as a payment method for retail purchases, or kept as an investmentvehicle. There was a trading risk involved on early exchanges: Buyers could reversepayments; and sellers disappear without transferring the bitcoins. Most exchanges nowhave security safeguards in place to prevent this behaviour.

3 Data Overview

3.1 SourceWe obtain bitcoin price data from Bitcoincharts.com, selecting data for seven bitcoinexchanges reporting 200 or more days of transactions in both US dollars and at least oneother currency between January 1 and December 31, 2014. Our bitcoin data containthe open, high, low, close and volume weighted trade price for a 24 hour period. Whilebitcoin pricing data is available every minute for the year, we use volume weightedaverage daily price data, measured from midnight to midnight, to match the availabilityof exchange rate data. Our exchange rate data comes from Oanda.com, as it is the mostcomparable to our data. Instead of reporting market closing price as the exchange rate,Oanda.com reports the average exchange rate over a 24 hour period of global trading,seven days of the week for all of our currencies.

2

Figure 1: High, low and average USD bitcoin price on seven exchanges

3.2 Bitcoin Exchange Structure and Illegal ActivitiesFor many, bitcoins have a strong association with illegal activities. There are two waysbitcoins can be used as payments for criminal activities. The first involves the pur-chase of bitcoin on an exchange to use for illicit purchases at a different location, forexample Silk Road2. There is no reason to believe criminals would not seek the lowestavailable price for their acquisition of bitcoins, so activities of this nature would notinterfere with arbitrage. The second method involves a bitcoin exchange in which twoindividual can directly choose to conduct a transaction with each other, called a “de-centralized bitcoin exchange”. Decentralized exchanges could function as facilitatorsfor payments of illegal activities. In this case, the anonymity afforded by the exchangeis more important than the bitcoin prices on the exchange – the price of a single bit-coin could be set artificially high as a payment requirement – thereby preventing priceequalization with other exchanges. Of our seven exchanges, one is a decentralizedexchange: LocalBitcoin.

Figure (1) shows the high, low and average price for bitcoins in USD for one day,February 6, 2014. The prices on LocalBitcoins behaves very differently than the priceson the other exchanges. In addition to being a decentralized exchange, LocalBitcoindoes not actually provide an electronic platform to exchange currency, only bitcoins,therefore posters on LocalBitcoin indicate their preferred method of payment. Even ifwe limit ourselves to transactions that occur in US dollars, there is still a wide variationof such a payment may involve: equivalent gold value, cash deposit into a bank account,

2In June 2013, the United States Drug Enforcement Administration seized the assets of Silk Road, ananonymous online marketplace that provided a platform for the sale of drugs and other illegal activities. SilkRoad was not a bitcoin exchange, instead, it was simply an online marketplace in which transactions wereconducted in bitcoins to reduce the ability of law enforcement to trace and seize payments.

3

LocalBitcoin btc-e Kraken itBit HitBTC The Rock ANXBTCBitcoin price in US dollarsAverage 576.15 517.49 525.78 522.65 522.61 524.79 517.22Median 558.36 498.00 512.55 502.15 503.76 504.73 499.82Std. Deviation 153.52 143.37 141.97 144.06 143.74 146.03 138.64Observations 364 362 350 364 365 359 342

Bitcoin price in EurosAverage 411.54 393.96 389.51 375.40 387.51 397.73 362.42Median 393.15 381.90 374.37 368.12 372.98 384.23 359.26Std. Deviation 107.49 99.63 94.99 87.89 94.67 100.35 73.72Observations 364 365 359 271 359 359 245

Table 1: Bitcoin Price Summary

an online transfer through Paypal, or a face-to-face meet to name a few options.All the remaining exchanges allow users to store both currency and bitcoins in their

wallets, and thereby require that transactions occur on the exchange using funds fromthe users wallet. With the exception of btc-e, bitcoins can be transferred to walletsacross exchanges for free. Therefore, even in a decentralized exchange, a criminalcould stipulate payment in bitcoin, then transfer it to an exchange with better prices.

In extreme contrast to the decentralized exchanges, users on the “centralized” ANXBTCexchange never directly transact with each other. Instead, any user wanting to engagein a transaction enters the number of bitcoins to buy or sell, which is sent to a groupof ANXBTC-selected buyers and sellers. The user is then given 30 seconds to accepta quoted price for their trade.3 This layer does not exist on any other exchange. Inthe remaining “clearing” exchanges, buyers and sellers post prices, and the exchangematches the bid with the closest acceptable bid to that price range.

4 Bitcoin PricesTable (1) summarizes bitcoin prices in US dollars and in Euros for our seven exchanges.As expected, LocalBitcoin has the largest spread in prices while ANXBTC has thesmallest. Transfers of bitcoins across exchanges take less than 24 hours so one couldeasily buy a bitcoin at a low price exchange and sell it at a high price exchange, whichmakes the existence of the difference in prices remarkable. Furthermore, the pricingdata we’ve used for the exercise is available free of charge and up-to-minute to thegeneral public. Therefore, even if one disregards LocalBitcoins where deviations fromprice could be explained by illegal activity, the prices on the remaining exchangesshould be approximately equal: yet clearly they are not.

Table (2) summarizes the correlation of bitcoin prices on the exchanges throughtime, and reports the β coefficient and R2 from the OLS regression

BCi,t = βBC

HitBTC,t + c (1)

3Stop and limit orders are also available on all except the Decentralized platforms.

4

Correlation (USD price), 320 ObservationsANXBTC LocalBitcoin btc-e Kraken itBit HitBTC The Rock

ANXBTC 1.000 - - - - - -LocalBitcoin 0.987 1.000 - - - - -btc-e 0.995 0.989 1.000 - - - -Kraken 0.993 0.990 0.997 1.000 - - -itBit 0.992 0.989 0.995 0.994 1.000 - -HitBTC 0.993 0.985 0.997 0.994 0.993 1.000 -TheRock 0.994 0.990 0.996 0.995 0.994 0.995 1.000

USD Price RegressionHitBTC 1.027 1.054 0.993 1.006 1.001 1.000 1.005R2 0.987 0.976 0.996 0.991 0.989 1.000 0.992Observation 342 364 362 350 364 365 359

Correlation (Euro price), 214 ObservationsANXBTC LocalBitcoin btc-e Kraken itBit HitBTC The Rock

ANXBTC 1.000 - - - - - -LocalBitcoin 0.966 1.000 - - - - -btc-e 0.987 0.963 1.000 - - - -Kraken 0.996 0.968 0.992 1.000 - - -itBit 0.995 0.965 0.989 0.997 1.000 - -HitBTC 0.995 0.966 0.992 0.999 0.996 1.000 -TheRock 0.995 0.968 0.992 0.998 0.995 0.997 1.000

Euro Price RegressionHitBTC 1.019 1.057 1.005 1.003 1.010 1.000 1.016R2 0.989 0.910 0.991 0.994 0.987 1.000 0.993Obs 245 358 359 358 268 359 353

Table 2: Bitcoin Prices across Time

where c represents a constant. HitBTC prices are used as it has the most data coveragefor both prices. Prices are highly correlated across markets indicating that – whilethere are level differences – there is some level of arbitrage seeking across markets.The lowest correlation is, unsurprisingly, LocalBitcoin.

5 Bitcoin Exchange Rates

5.1 Theory

Figure 2: Example of a Triangular Arbitrage Opportunity

Figure 2 depicts a possible triangular transaction, using data from 10 February

5

ANXBTC btc-e HitBTC itBit Kraken LocalBitcoin The RockMedian(%) 0.02 1.47 0.03 -0.07 -0.38 -5.14 0.72Average(%) -0.01 1.83 0.09 0.13 -0.43 -4.70 0.83Average Absolute Gains(%) 0.33 2.00 0.46 1.09 1.16 5.80 1.59Max(%) 5.78 31.18 5.99 34.07 17.26 33.87 8.12Min(%) -5.65 -3.60 -2.94 -6.11 -8.86 -15.62 -5.43Std Deviation(%) 0.77 2.25 0.76 2.56 1.81 4.94 1.92Kurtosis 29.39 80.71 14.01 114.15 28.91 22.88 1.34Skewness -0.97 8.71 1.85 8.71 1.91 3.54 0.30Count 244 362 359 271 349 364 353

Table 3: USD-EUR Exchange Daily Gains Summary

in the exchange BTC-e. A bitcoin is bought using US dollars, sold for Euros, thentransferred back into a bank account using the official exchange rate. The gain from thistransaction – in which all aspects except the final bank transfer can take only seconds– is 7.43%.4

A bitcoin price can be treated as floating purely floating exchange rate betweenBitcoin and the currency in which the transaction is engaged in, for example 1 Bit-coin=US$500. The bitcoin exchange rate, Eb,C

i,t , between an originating currency, C,and the US dollar is calculated using the bitcoin prices on a bitcoin exchange market iat time t, BC

i,t , and the bitcoin price in US Dollars, BUSDi,t , given by

EB,Ci,t =

BCi,t

BUSDi,t

(2)

While in section (4) we showed that bitcoin prices are different in levels, equation (2)there shows that exchange rates can be equal across markets as long as prices follow amultiplicative difference.

Define the gains on day t from using bitcoin instead of the official exchange rate as

GC,USDi,t =

EB,Ci,t −EO,C

t

EO,Ct

(3)

If there were no arbitrage opportunities then GC,USDi,t would be zero.

5.2 USD to EuroAll seven of our markets operate in both USD and Euros. The summary of gains foreach exchange is provided in Table (3). There are both positive and negative gains(losses), with gains varying widely from exchange to exchange: average gains rangefrom -5.14% to 1.47%, and distributional moments (skewness, kurtosis and deviation)also vary greatly. The bitcoin exchange rates do not matching official foreign exchangerates, nor do they match each other. Given the unique nature of LocalBitcoins, it is notsurprising that – as was seen in in Table (1) regarding bitcoin prices – it reports thegreatest average gains.

4As we cannot track bitcoin movements across exchanges, we must assume that all the trading occurs onone exchange to simplify analysis.

6

LocalBitcoin Kraken itBit ANXBTC HitBTC The Rock btc-eMedian Gain(%) -5.14 -0.38 -0.07 0.02 0.03 0.72 1.51Average Gain(%) -4.70 -0.43 0.13 -0.01 0.09 0.83 1.84Trading Fee 0%-1.00% 0.10%-0.35% 0.25%-0.50% 0% 0.10% 0.50% 0.20%Market Type Decentralized Clearing Clearing Authorized Clearing Clearing Clearing

Table 4: Trading Fees and Market Type

Table (4) posts the gains relative to trading costs in each exchange. The tableis organized from lowest median gain to highest median gain for ease of analysis.On bitcoin exchanges trading fees do not depend upon the currency of transaction,or whether one is buying or selling.5 Instead, trading fees vary based upon volume, ora measure of “activeness”. For example, on LocalBitcoin, posting an advertisement –whether to buy or sell bitcoins – results in a 1% charge on the posted trade price, whileaccepting a posted offer results in no transaction charge.

It is immediately obvious that fees cannot fully explain the differences in level ofgains: Kraken, whose fees fall between HitBTC and TheRock, posted lower gains thaneither exchange, and the same is true for itBit. Despite having the third lowest guar-anteed fees – the fourth if fee ranges are considered – btc-e posts the highest mediangains. The same pattern is observed when using average gains.

Clearly, however, the nature of the exchange matters. The decentralized LocalBit-coin exchange appears on the extreme end of gains. As ANXBTC exchange is the mostclosely monitored, and it is not surprising that users post gains closest to 0%. Marketstructure can partially explain why gains from exchanges differ from each other. How-ever, even when comparing only markets of similar types, there is still no clear patternof gains with trading fees.

5.3 Time TrendsFigure (3) shows bitcoin exchange rates for the seven exchanges over time as well asthe official exchange rate. It is clear the highly centralized ANXBTC exchange has avery low variance and deviation from the official exchange relative to the decentralizedexchanges. Table (5) presents the correlation of bitcoin and the official exchange rate,as well as the coefficient and R2 results of the regression

EB,Ci,t = βEO,C

t + c (4)

All coefficients are significant to the 1% level. Similar to the results with prices, all theexchanges, except LocalBitcoin, are highly correlated with the official Euro exchangerate trend.

7

(a) Decentralized Exchange: LocalBitcoin

(b) Clearing Exchanges: btc-e, itBit, HitBTC, Kraken, The Rock

(c) Authorized Exchange: ANXBTC

Figure 3: Official and and Bitcoin USD-EUR exchange rate

8

Local btc-e Kraken itBit HitBTC The Rock ANXBTC

Full SampleCorr. 0.584 0.891 0.910 0.849 0.984 0.904 0.985EO,C

t 0.855 1.078 0.976 0.964 1.018 0.961 1.021R2 0.342 0.794 0.829 0.722 0.969 0.819 0.971Obs. 364 362 349 271 359 353 244

Constrained Sample: 198 observationsCorr. 0.639 0.856 0.904 0.828 0.982 0.906 0.990EO,C

t 0.911 1.061 0.941 0.959 1.024 0.928 1.028R2 0.408 0.732 0.817 0.686 0.965 0.821 0.979

Table 5: Relationship with official Euro exchange rate over time

Figure 4: LocalBitcoins, official, and black market exchange rate for ARS

9

Entire Sample Matching DatesOfficial Black Market Official Black Market

Obs 250 182 182 182Average (%) 32.41 -12.57 33.04 -12.57Median (%) 30.96 -12.56 31.41 -12.56Max (%) 73.76 -0.64 73.76 -0.64Min (%) 8.06 -22.03 -9.77 -22.03Std. Dev (%) 14.14 3.62 13.33 3.62Exchange Rate Correlation with Bitcoin

0.404 0.928 0.413 0.928OLS Regression with BitcoinXR Coefficient 1.121 0.747 1.034 0.747R2 0.163 0.861 0.170 0.861

Table 6: Bitcion, Official, and Unofficial Exchange Rates. ARS (Jan 1-Oct 4, 2014)

6 Official and Unofficial Exchange Rates

6.1 Currency Trading: Gains over Black Market Rate in ARSArgentina is one of the few currencies for which there exists data on their black marketexchange rate. Argentine pesos (ARS) can now also be bought and sold in the Lo-calBitcoins market as an alternative to street vendors. As we will show, even thoughLocalBitcoins may be dominated by illegal transactions, in Argentina’s case the domi-nant illegal transactions appear to be foreign exchange transactions.

Figure (4) shows the official and black market exchange rates obtained from GlobalFinancial Data and the LocalBitcoin exchange rate computed as in the prior section. Itis clear that the LocalBitcoin exchange rate closely follows the time trend of blackmarket exchange rate, but not the official exchange rate.

This intuition is verified in Table (6), which repeats the excercises conducted withthe Euro across both official and black market exchange rates. Gains on the official rateare much higher and varied than gains obtained from the black market, and bitcoin rateis considerably more correlated with the time trend of the black market rate than theofficial rate. This shows that bitcoin exchange rates can be used to infer the potentialexistence and movement of black market exchange rates.

6.2 Evaluating Other CurrenciesThe correlation between the black market exchange rates and the bitcoin exchangerates through time implies that for any currency one can use the constructed bitcoin ex-change rate as a measure of international transactions not conducted using the officialexchange rate and its associated institutions. There is a subtlety here: deviation fromthe official exchange rate can occur either due to an active black market for foreign

5A discussion and table of all fees, including transfer fees, can be found in appendix A. Transfer fees aremore complicated, but do not affect results from this discussion.

10

(a) AUD (b) CAD (c) CHF

(d) CNY (e) EUR (f) GBP6

(g) HKD (h) INR (i) JPY

(j) MXN (k) NOK (l) NZD

(m) PLN (n) RUB (o) SEK

(p) SGD (q) ZAF

Figure 5: Official and Bitcoin exchange rates

11

LocalBitcoin ANXBTCCorrel XR R2 Correl XR R2

EUR 0.604 0.888 0.365 0.997 1.002 0.995AUD 0.845 1.219 0.714 0.997 1.001 0.994CAD 0.548 0.882 0.300 0.996 0.996 0.993CHF - - - 0.998 1.001 0.995CNY - - - 0.547 1.338 0.299GBP 0.732 0.946 0.535 0.997 1.002 0.994HKD - - - 0.410 0.974 0.168INR 0.536 1.284 0.288 - - -JPY - - - 0.998 1.002 0.996MXN 0.839 1.165 0.703 - - -NOK 0.857 0.904 0.734 - - -NZD 0.789 0.860 0.622 0.996 0.995 0.991PLN 0.692 0.556 0.479 - - -RUB 0.975 0.923 0.951 - - -SEK 0.829 1.033 0.687 - - -SGD - - - 0.997 1.000 0.995ZAF 0.622 1.731 0.386 - - -

Table 7: Correlation with Official Exchange Rate, 190 Obs.

currencies, or because of a high volume of transactions that circumvent official finan-cial channels, possibly due to their illegal nature. We will use data from ANXBTC andLocalBitcoin, which results in bitcoin exhcnage rates for 18 currencies with 5 coveredby both exchanges. We emphasize that this is not an exhaustive list of all bitcoin ex-changes conducting business in a given currency, merely exchanges for which we havedata and that conduct sales in US dollars.

Figure (5) plots official and bitcoin exchange rates for our 17 non-Euro curren-cies from June 1 until December 1, dropping 25 dates for a uniform 190 observationsacross all currencies and both exchanges. Table (7) lists the correlation and regres-sion values between the indicated bitcoin exchange rate and the official exchange rate.As expected, LocalBitcoin is uniformly less correlated with the exchange rate thanANXBTC – Any rule using bitcoin to determine whether an official exchange rate is“good” will need to be bitcoin exchange specific. Finally, Table (8) ranks the cur-rency from most to least correlated both amongst all the currencies on the exchange,for currencies that are traded on both exhcanges, and for currencies only trade on oneexchange.

Using ANXBTC exchange rates, we observe that both the official Chinese andHong Kong exchange rates are suspect: unsurprising given that both are economiesknown for exchange rate management policies. This indicates that research papersexamining these exchange rates over time may be well served using the bitcoin con-structed exchange rate in a robustness check of results.

Amongst the currencies on LocalBitcoin, none have correlations or R2 lower thanthat of the Argentine Peso: The lower correlation are the South African Rand (ZAF),

12

Local Bitcoin ANXBTCCorrel R2 Correl R2

Rank All Currencies on ExchangeRUB 0.975 0.951 JPY 0.998 0.996NOK 0.857 0.734 CHF 0.998 0.995AUD 0.845 0.714 EUR 0.997 0.995MXN 0.839 0.703 SGD 0.997 0.995SEK 0.829 0.687 AUD 0.997 0.994NZD 0.789 0.622 GBP 0.997 0.994GBP 0.732 0.535 CAD 0.996 0.993PLN 0.692 0.479 NZD 0.996 0.991ZAF 0.622 0.386 CNY 0.547 0.299EUR 0.604 0.365 HKD 0.410 0.168CAD 0.548 0.300 - - -INR 0.536 0.288 - - -

Rank Currency On Only One ExchangeRUB 0.975 0.951 JPY 0.998 0.996NOK 0.857 0.734 CHF 0.998 0.995MXN 0.839 0.703 SGD 0.997 0.995SEK 0.829 0.687 CNY 0.547 0.299PLN 0.692 0.479 HKD 0.410 0.169ZAF 0.622 0.386 - - -INR 0.536 0.288 - - -

Rank Currencies On Both ExchangesAUD 0.845 0.714 EUR 0.997 0.995NZD 0.789 0.622 AUD 0.997 0.994GBP 0.732 0.535 GBP 0.997 0.994EUR 0.604 0.365 CAD 0.996 0.993CAD 0.548 0.300 NZD 0.996 0.991

Table 8: Ranking Official Exchange Rate

13

the Euro, the Canadian Dollar (CAD), and the Indian Rupee (INR). Of these four, boththe Euro and the Canadian Dollar are measured on ANXBTC and show no signs ofan active black market. It is likely that for these two currencies there many transac-tions occurring on LocalBitcoin attempting to circumvent official financial institutionsthat do not occur on ANXBTC. Correspondingly, ANXBTC reflects that the officialexchange rate is a good data, while the LocalBitcoin reflects a different story. Whichis the “true” exchange rate depends upon the question of the researcher.

7 ConclusionThis work examines the foreign exchange arbitrage opportunities by trading bitcoinsacross currencies. Bitcoin exchange rates can be used a method to evaluate the accuracyof exchange rates regarding interntional transactions, and the degree to which a blackmarket exists.

ReferencesAkram, Q. F., Rime, D., and Sarno, L. (2008). Arbitrage in the foreign exchange

market: Turning on the microscope. Journal of International Economics.

Bahmani-Oskoee, M. and Tankui, A. (2008). The black market exchange rate vs. theofficial rate in testing ppp: Which rate fosters the adjustment process. EconomicsLetters.

Bitcoincharts.com. Website: www.bitcoincharts.com. Retrieved: 1 January 2015.

Global Financial Data. Website:www.globalfinancialdata.com/index.html. Retrieved:8 November 2014.

Oanda.com. Website: www.oanda.com/currency/historical-rates. Retrieved: 1 January2015.

Wada, T. (2012). The real exchange rate and real interest differentials: The role oftrend-cycle decomposition. Economic Inquiry.

A Transfer and Trading FeesTable 9 shows the trade and transfer fees associated with depositing and withdrawingfiat currency from the named bitcoin exchange. Transfers of bitcoins are free of chargeexcept on btc-e. Bank wires, as opposed to a virtual payment (i.e. paypal) or creditcard funding (VISA, Mastercard) is chosen as the transfer method. Deposits and with-drawals Euros have fees that vary based upon whether the bank account in situated ina SEPA-zone6

6Single Euro Payments Area. This consists of roughly the countries in the European Union, the EuropeanFree Trade Association, Monaco, and San Marino.

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ANXBTC btc-e HitBTC itBit Kraken LocalBitcoin The RockTrading Fee 0% 0.2% 0.1% 0.25%-0.50% 0.10%-0.35% 0%-1% 0.5%Transfer Fee, Deposit$ 0% 0%-6% $9 $5 0.19% N/A 0%SEPA e 0% 0%-6% 0% e3.64 0% N/A 0%Non-SEPA e 0% 0%-6% e6 1% e5 N/A 0%Transfer Fee, Withdrawal$ 0.5%+$25 0%-6% $9 $30 0.19% N/A 0.125%SEPA e 1% 0%-6% 0% e8.03 0% N/A e1Non-SEPA e 0.5%+e20 0%-6% e6 e8.03 e40 N/A 0.125%Median Gain 0.02% 1.51% 0.03% -0.07% -0.38% -5.14% 0.73%Average Gain -0.01% 1.84% 0.09% 0.13% -0.43% -4.71% 0.84%

Table 9: Transfer Fees USD-EUR Exchange

Consider an individual living in the SEPA zone. They could deposit money inANXBTC, buy bitcoins, transfer the bitcoins to Kraken, sell the bitcoins for Euro’s,then withdraw them. The entire transaction would incur only Kraken’s trading fee. Theability to transfer bitcoins for free amongst exchanges only increases price equalizationacross exchanges, making the differences across markets more inexplicable.

B Online Appendix

B.1 Euro Exchange DataThroughout the paper, it is clear that the centralized exchange has much lower vari-ability than the other exchanges. When we repeat the exercise on Euro exhcange ratesusing data that has been smoothed across 3 observations, our findings do not change.

Local btc-e Kraken itBit HitBTC The Rock ANXBTCObservations 364 362 349 271 359 353 244Full SampleCorrelation 0.672 0.955 0.967 0.977 0.993 0.947 0.994OLS Regression: All significant at 1%Official XR 0.835 0.849 0.976 0.964 1.025 0.964 1.023R2 0.452 0.912 0.935 0.955 0.986 0.898 0.988Constrained Sample: 198 observationsCorrelation 0.790 0.948 0.953 0.984 0.990 0.945 0.993OLS Regression: All significant at 1%Official XR 0.908 1.062 0.947 0.969 1.029 0.932 1.026R2 0.624 0.900 0.908 0.968 0.981 0.892 0.985

Table 10: Time Correlations of Euro Exchange Rate, Smoothed data

B.2 ARS Exchange DataWe also repeat the exercise with the ARS exchange rate, and again, while correlationsare higher with smoothed data, it is still unmistakable that the bitcoin exchange rate isfollowing the black market, not the official, rate.

15

Entire Sample Matching DatesOfficial Black Market Official Black Market

Obs 250 182 182 182Exchange Rate Correlation with Bitcoin

0.421 0.945 0.417 0.945OLS Regression with BitcoinXR Coefficient 1.135 0.752 1.027 0.752R2 0.177 0.894 0.174 0.894

Table 11: Daily gains using the official and the black market exchange rate - ARS(January 1, 2014-October 4, 2014), Smoothed

B.3 Correlation with Official Exchange DataB.3.1 Full Sample

In the paper we restrict our attention to June 1-December 31st, and ensure that allcurrencies have an equal number of observations. The reason for the June 1 date isthat for several foreign currencies ANXBTC does not consistently report data untilafter the of May. Figure (6) plots the available data from January 1st to December31st for all currencies. In Table (12) we present the results using the full, unsmootheddata sample. This does allow for the coverage of more currencies, however now theobservations numbers vary from a low of 222 to a high of 365 and suffers from gaps(which is why China reports a negative correlation). Furthermore, currencies that are onboth exchanges (the Hong Kong Dollar, for example) are being sampled over differentperiods. One of the additions is the Swiss Franc (CHF), which similar to the Euro andthe Canadian Dollar reports a low correlation on LocalBitcoin, but a high correlationon ANXBTC, presumably for similar reasons.

16

(a) AUD (b) BRL (c) CAD (d) CHF

(e) CNY (f) CZK (g) GBP (h) HKD

(i) INR (j) JPY (k) MXN (l) NOK

(m) NZD (n) PLN (o) RUB (p) SEK

(q) SGD (r) ZAF

Figure 6: Full Sample Graphs

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LocalBitcoin ANXBTC SortedObs Correl XR R2 Obs Correl XR R2 Local Bitcoin

EUR 364 0.584 0.855 0.342 244 0.985 1.021 0.971 RUB CHFARS 250 0.404 1.120 0.163 - - - - SEK CADAUD 364 0.812 1.243 0.656 257 0.940 1.020 0.883 AUD NZDBRL 315 0.463 0.677 0.214 - - - - NOK SGDCAD 364 0.401 0.764 0.161 222 0.996 0.998 0.993 PLN JPYCHF 307 0.208 0.436 0.043 222 0.997 1.006 0.994 NZD EURCNY - - - - 248 -0.41 -10.97 0.162 GBP AUDCZK 313 0.474 1.108 0.225 - - - - MXN HKDGBP 364 0.665 0.967 0.442 364 0.982 1.011 0.964 SGD CNYHKD 312 0.097 9.146 0.009 342 0.137 3.967 .0.019 EURINR 363 0.385 1.002 0.148 - - - - CZKJPY - - - - 223 0.992 1.010 0.983 BRLMXN 364 0.612 0.968 0.374 - - - - ZAFNOK 347 0.731 0.789 0.534 - - - - ARSNZD 362 0.669 0.841 0.447 223 0.995 0.996 0.991 CADPLN 329 0.724 0.785 0.524 - - - - INRRUB 362 0.961 0.926 0.923 - - - - CHFSEK 362 0.833 1.018 0.693 - - - - HKDSGD 311 0.602 0.891 0.361 311 0.993 0.993 0.986ZAF 364 0.447 1.239 0.199 - - - -

Table 12: Correlation with Official Exchange Rate,Unsmoothed Full Sample

B.3.2 Smoothed Samples

Table (13) repeats the exercise on the full sample using 3 data-point smoothing. Table(14) presents the data in ranked order.

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LocalBitcoin ANXBTCObs. Correl XR R2 Obs. Correl XR R2

EUR 364 0.672 0.835 0.452 244 0.994 1.023 0.988ARS 250 0.421 1.135 0.177 - - - -AUD 364 0.878 1.259 0.770 257 0.973 1.014 0.947BRL 257 0.551 0.694 0.303 - - - -CAD 364 0.507 0.745 0.257 222 0.998 0.999 0.996CHF 307 0.430 0.530 0.185 222 0.998 1.008 0.996CNY - - - - 221 0.6146 1.706 0.378CZK 313 0.711 0.890 0.506 - - - -GBP 364 0.767 1.011 0.589 236 0.990 1.010 0.981HKD 312 0.123 9.875 0.015 342 0.155 2.606 0.024INR 363 0.537 1.144 0.288 - - - -JPY - - - - 223 0.993 1.011 0.985MXN 364 0.706 0.992 0.498 - - - -NOK 347 0.800 0.789 0.640 - - - -NZD 362 0.756 0.874 0.572 223 0.998 0.999 0.995PLN 328 0.597 0.681 0.356 - - - -RUB 362 0.975 0.928 0.951 - - - -SEK 362 0.892 1.033 0.796 - - - -SGD 310 0.153 0.645 0.023 226 0.988 1.003 0.976ZAF 364 0.507 1.222 0.257 - - - -

Table 13: Correlation with Official Exchange Rate, Smoothed, Full Sample

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Correlation Regression R2

Local Bitcoin ANXBTC Local Bitcoin ANXBTC

RUB 0.975 CAD 0.998 RUB 0.951 CAD 0.996SEK 0.892 CHF 0.998 SEK 0.796 CHF 0.996AUD 0.878 NZD 0.998 AUD 0.770 NZD 0.995NOK 0.800 EUR 0.994 NOK 0.640 EUR 0.988GBP 0.767 JPY 0.993 GBP 0.589 JPY 0.985NZD 0.756 GBP 0.990 NZD 0.572 GBP 0.981CZK 0.711 SGD 0.988 CZK 0.506 SGD 0.976MXN 0.706 AUD 0.973 MXN 0.498 AUD 0.947EUR 0.672 CNY 0.615 EUR 0.452 CNY 0.375PLN 0.597 HKD 0.155 PLN 0.356 HKD 0.024BRL 0.551 BRL 0.303INR 0.537 INR 0.288CAD 0.507 CAD 0.257ZAF 0.507 ZAF 0.257CHF 0.430 CHF 0.185ARS 0.421 ARS 0.177SGD 0.153 SGD 0.023HKD 0.123 HKD 0.015

Rank Currency Only On One ExchangeRUB 0.975 JPY 0.993 RUB 0.951 JPY 0.985SEK 0.892 CNY -0.719 SEK 0.796 CNY 0.517NOK 0.800 NOK 0.640CZK 0.711 CZK 0.506MXN 0.706 MXN 0.498PLN 0.597 PLN 0.356BRL 0.551 BRL 0.303INR 0.537 INR 0.288ZAF 0.507 ZAF 0.257ARS 0.421 ARS 0.177

Rank Currencies on Both ExchangesAUD 0.878 CAD 0.998 AUD 0.770 CAD 0.996GBP 0.767 CHF 0.998 GBP 0.589 CHF 0.996NZD 0.756 NZD 0.998 NZD 0.572 NZD 0.995EUR 0.672 EUR 0.994 EUR 0.452 EUR 0.988CAD 0.507 GBP 0.990 CAD 0.257 GBP 0.981CHF 0.430 SGD 0.988 CHF 0.185 SGD 0.976SGD 0.153 AUD 0.973 SGD 0.023 AUD 0.947HKD 0.123 HKD 0.155 HKD 0.015 HKD 0.024

Table 14: Ranking Official Exchange Rate Data, Smoothed Full Sample

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B.3.3 Matched Samples

Finally, currencies that are on both exchanges have matched observation dates, and the3 sample smoothing applied. Table (15) presents the results, while Table (16) ranks.

LocalBitcoin ANXBTCObs. Correl XR R2 Obs. Correl XR R2

EUR 244 0.764 0.864 0.583 244 0.994 1.023 0.988AUD 257 0.884 1.231 0.781 257 0.973 1.014 0.947CAD 222 0.651 0.852 0.424 222 0.998 0.999 0.996CHF 192 0.470 0.636 0.221 192 0.998 1.008 0.995GBP 236 0.819 0.993 0.671 236 0.990 1.010 0.981HKD 296 0.062 5.078 0.004 296 0.152 2.640 0.023NZD 222 0.863 0.881 0.745 222 0.998 0.999 0.995SGD 186 0.055 0.0945 0.003 186 0.986 1.007 0.971

Table 15: Correlation with Official Exchange Rate, Smoothed, Matched

Correlation Regression R2

Local Bitcoin ANXBTC Local Bitcoin ANXBTCAUD 0.884 CAD 0.998 AUD 0.781 CAD 0.996NZD 0.863 CHF 0.998 NZD 0.745 CHF 0.995GBP 0.819 NZD 0.998 GBP 0.671 NZD 0.995EUR 0.764 EUR 0.994 EUR 0.583 EUR 0.988CAD 0.651 GBP 0.990 CAD 0.424 GBP 0.981CHF 0.470 SGD 0.986 CHF 0.221 SGD 0.976HKD 0.062 AUD 0.973 HKD 0.004 AUD 0.973SGD 0.055 HKD 0.152 SGD 0.055 HKD 0.024

Table 16: Ranking Official Exchange Rate Data, Smoothed, Matched

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