Bitcoin arbitrage: The role of an exchange

Ethan Flowerday; Neil Gandal; Hanna Halaburda; Eric Olson; Gabriela Ardel; Ethan Flowerday; Neil Gandal; Hanna Halaburda; Eric Olson; Gabriela Ardel

doi:10.3934/QFE.2026024

Quantitative Finance and Economics

2026, Volume 10, Issue 3: 624-648. doi: 10.3934/QFE.2026024

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Research article

Bitcoin arbitrage: The role of an exchange

1.
School of Cyber Studies, University of Tulsa, 800 S Tucker Dr, Tulsa, OK 74104, United States
2.
Berglas School of Economics, Tel Aviv University, Chaim Levanon St 30, Tel Aviv-Yafo, 6997801, Israel
3.
Stern School of Business, New York University, 44 West 4th Street, New York, NY 10012, United States
4.
Institute for Governance and Civics, Florida State University, 634 W. Call Street, Tallahassee, FL 32306, United States

Received: 26 March 2026 Revised: 13 August 2026 Accepted: 24 August 2026 Published: 01 September 2026
JEL Codes: G14, G12, G18

This paper examines how persistent BTC/USD price differences across major centralized exchanges are impacted by exchange-specific frictions, particularly fiat-to-crypto gateway frictions. Using tick-level trade data from Bitfinex, Bitstamp, Coinbase, and Kraken over January 2017 to June 2021, we construct a conservative hourly cross-exchange mispricing index from within-interval transaction price extrema, complemented by a 1-minute lifetime analysis and event study tests. The results show that approximately 80% of hours with a measured price dispersion include Bitfinex. When Bitfinex is excluded, the upper tail of the distribution contracts sharply, the correlation between mispricing and volatility falls from 0.86 to 0.59, and the restricted mean duration of positive episodes declines from 11.1 to 3.6 minutes. Event study evidence around banking stress and regulatory action supports these findings, with abnormal mispricing concentrated in the full sample and largely absent once Bitfinex is removed. We interpret the Bitfinex premium as a form of fiat redemption risk: When on-exchange USD balances cannot be redeemed with the same certainty as off-exchange dollars, BTC/USD quotes across venues no longer represent identical claims. The findings extend limits-of-arbitrage reasoning to the exchange-institutional level, showing that price convergence in digital asset markets is shaped by fiat-route stability and institutional trust.
- Bitcoin,
- cryptocurrency markets,
- econometrics,
- limits of arbitrage,
- market efficiency,
- market microstructure,
- survival analysis
Citation: Ethan Flowerday, Neil Gandal, Hanna Halaburda, Eric Olson, Gabriela Ardel. Bitcoin arbitrage: The role of an exchange[J]. Quantitative Finance and Economics, 2026, 10(3): 624-648. doi: 10.3934/QFE.2026024

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Abstract

This paper examines how persistent BTC/USD price differences across major centralized exchanges are impacted by exchange-specific frictions, particularly fiat-to-crypto gateway frictions. Using tick-level trade data from Bitfinex, Bitstamp, Coinbase, and Kraken over January 2017 to June 2021, we construct a conservative hourly cross-exchange mispricing index from within-interval transaction price extrema, complemented by a 1-minute lifetime analysis and event study tests. The results show that approximately 80% of hours with a measured price dispersion include Bitfinex. When Bitfinex is excluded, the upper tail of the distribution contracts sharply, the correlation between mispricing and volatility falls from 0.86 to 0.59, and the restricted mean duration of positive episodes declines from 11.1 to 3.6 minutes. Event study evidence around banking stress and regulatory action supports these findings, with abnormal mispricing concentrated in the full sample and largely absent once Bitfinex is removed. We interpret the Bitfinex premium as a form of fiat redemption risk: When on-exchange USD balances cannot be redeemed with the same certainty as off-exchange dollars, BTC/USD quotes across venues no longer represent identical claims. The findings extend limits-of-arbitrage reasoning to the exchange-institutional level, showing that price convergence in digital asset markets is shaped by fiat-route stability and institutional trust.

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