ZUBR: crypto market arbitrage no longer “go-to” strategy as price discovery improves

Crypto markets have adapted to better price discovery even on days of extreme price volatility, making arbitrage strategies no longer the ‘go-to’, according to a report by digital assets derivatives exchange ZUBR.

ZUBR’s platform is for hedge funds, HFT traders and other parties who bear cryptocurrency price exposure risks as a part of their operational activity. Currently in beta, ZUBR is due to launch in the first quarter of 2020.

The report, covering data from 2017 to 2019, examines price discovery, market development and the relationship between volatility and liquidity based on trading volumes across regulated exchanges under a macro and micro lens.

A spokeswoman from the firm explained: “Many of the crypto hedge funds have made money by finding the same token or coin that is priced differently across exchanges. This point is that this very basic arbitrage has effectively gone as the exchanges have found ways to show a single exchange (or close to) over time. The same thing happened when FX exchanges first went online.”

Key findings from the report include:

  • The gap in price discovery between the two leading bitcoin trading platforms has fallen from 15% to less than 1% in just two years: in 2019, the price difference on days that experienced upwards of 20% from the low price to the high price saw a gap difference across exchanges all under 0.9%. In 2018, arbitrage gaps during extreme volatility reached 7%, and in 2017, as high as 15.5%
  • The world’s two leading bitcoin exchanges are more similar than you think: major differences can be seen between exchanges within the past few years, but the gap in price discovery from a bird’s eye lens shows that markets are becoming more efficient in price discovery across markets. When comparing price differences for Coinbase versus Bitstamp, the gap now averages under 0.25% in 2019 between the daily highs. These price difference averages stood at almost double in previous years.
  • Opportunities from price swings have halved in three years: in 2017, 27% of the year saw price swings north of 10%. The amount of days that a price swing was larger than 10% in 2019 was less than half that at 12.6% of the year.
  • Bitcoin’s volatility still makes for a difficult Store-of-Value versus gold: a look at daily arbitrage lows and highs of gold in 2019 shows that during 92% of the year prices saw less than a 2% daily change. In 2019, Bitcoin saw price swings of less than 2% on just 47 days (less than 13% of the year). Gold’s peak volatility was well below 4%.
  • The liquidity-volatility relationship remains extremely problematic and unstable: trading volumes monitored every one second by ZUBR show increasing liquidity gaps as prices go up. Lack of liquidity when markets begin to heat up leads to significant price jumps and, in turn, propels volatility even further.

Ilgar Alekperov, CEO of ZUBR, said in a statement: “Our data shows just how much crypto exchanges and trading opportunities have changed over the course of three years. Investors used to visit spot exchanges to leverage arbitrage strategies. Now, we’re facing a more advanced trading world where crypto exchanges have standardized and price discovery has become so much more efficient.”

He added: “What we’re seeing as a result of these major changes is investors embracing other strategies and products, such as derivatives, in order to diversify and keep their competitive edge. It is a move towards the sort of comprehensive trading infrastructure we see within fiat markets. Investors need to be aware of these changes as they evaluate the crypto industry’s investment performance.”

Read the full report

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