ЭФФЕКТИВНОСТЬ РЫНКОВ КРИПТОВАЛЮТ

Аннотация

• данной работе анализируется эффективность криптовалютных бирж. Основной целью работы было выяснить, существует ли арбитраж на рынке криптовалют. В академической среде эта тема является актуальной, так как она ещё недостаточно изучена и требует дополнительных исследований. Основная гипотеза данной работы состоит в том, что рынок криптовалют далёк от эффективного. Соответственно, на нем могут существовать арбитражные возможности. Для исследования данного вопроса были выбраны самые крупные и ликвидные биржи: 1) OkCoin, 2) Binance, 3) Bitstamp, 4) Bitfinex, 5) Kraken, 6) Bittrex, 7) Huobi Global, 8) OkEx, 9) Cex io, 10) Coinbase, а также наиболее значимые валютные пары: BTC / USD, ETH / USD, BCH / USD, LTC / USD, XRP / USD. В ходе исследования было выявлено, что цены криптовалют не подчиняются процессу случайного блуждания и являются прогнозируемыми, основываясь на исторических данных. Из этого следует, что есть теоретические предпосылки для существования арбитража, но дальнейший анализ показал, что определенная часть арбитражных возможностей нивелируются издержками различных бирж. Таким образом, можно утверждать, что рынок криптовалют ближе к эффективному, чем это предполагается, так как, несмотря на теоретическую прогнозируемость цен, часть потенциальных арбитражных возможностей хорошо объясняются издержками, которые несет в себе процесс торговли на биржах. Однако, существует и другая часть, которая не поддаётся объяснениям, поэтому требуется дополнительный анализ и более аккуратная оценка структуры издержек криптовалютных бирж.

Abstract
This paper analyzes the efficiency of the cryptocurrency market. The main goal of the work was to find out whether there is an arbitrage on such market or not. In the academic environment, this topic is relevant, since it has not yet been sufficiently studied and requires additional research. The main hypothesis of this work is that the cryptocurrency market is far from efficient. Accordingly, there could exist some arbitrage opportunities. The largest and most liquid exchanges were selected to investigate this issue: 1) OkCoin, 2) Binance, 3) Bitstamp, 4) Bitfinex, 5) Kraken, 6) Bittrex, 7) Huobi Global, 8) OkEx, 9) Cex io, 10) Coinbase, as well as the most significant currency pairs: BTC / USD, ETH / USD, BCH / USD, LTC / USD, XRP / USD. The study revealed that cryptocurrency prices do not follow the random walk process and found predictability based on historical data. It follows that there are theoretical prerequisites for the existence of arbitrage, but further analysis has shown that a certain part of such opportunities are offset by the costs of various exchanges. Thus, it can be argued that the cryptocurrency market is closer to efficient than it is supposed to be, since, despite the theoretical predictability of prices, some of the potential arbitrage opportunities are well explained by the costs incurred by operations on cryptocurrency exchanges. However, there is another part that cannot be explained, so additional analysis and a more accurate assessment of the cost structure is required.

Table of Contents
Introduction.................................................................................................................................................................................. 5
Chapter 1: Literature review........................................................................................................................................... 8
Chapter 2: Methodology................................................................................................................................................ 10
2.1 Predictability    10
2.2 Potential arbitrage       12
Chapter 3: Data....................................................................................................................................................................... 15
Chapter 4: Estimation and Results........................................................................................................................ 18
4.1 Predictability    18
4.2 Potential Arbitrage     19
Chapter 6: Interpretation................................................................................................................................................ 22
Conclusion................................................................................................................................................................................. 23
References................................................................................................................................................................................... 24
Online resources.................................................................................................................................................................... 25
Appendix 1................................................................................................................................................................................ 26
Appendix 2................................................................................................................................................................................ 37

Introduction
Since the beginning of the twenty first century the world economy and financial sector have undergone incredible changes including the creation of cryptocurrencies and blockchain technology. Digital currencies provide a shift from the standard design of financial system infrastructures. Moreover, cryptocurrencies have developed phenomenally and gained popularity over the past few years. In the academic environment and among large investors, there were fierce discussions about the nature of cryptocurrencies and their future. Many of them thought that cryptocurrency is the ordinary financial bubble. However over time, cryptocurrencies have formed a market that had a market capitalization of more than $ 230 billion in 2019.1
The cryptocurrencies over the past few years have experienced both strong falls and incredible growth of trade volumes and prices with parallel increase in the number of non-integrated exchanges with ownership in different countries. More than 50 million of different financial agents actively trade cryptocurrencies on more than 110 exchanges across the world2. The entire financial structure and market is quite large and with such indicators, the question of studying the efficiency of the market and the possibilities of arbitrage becomes very relevant and interesting.
The concept of market efficiency firstly was appropriate tested by Jensen, and It was stated as «A market is efficient with respect to some information set if it is impossible to make economic profits by trading on the basis of this information set ». (Jensen,1978, p.3). So, the essential point for market efficiency is an ability of agents to get risk-adjusted profits with help of existing information. The Efficient Market Hypothesis (EHM) was formulated, generally, by Fama (1970) and this concept claims that prices of financial instruments reflect all information and it is impossible to get consistent economic profits. Consequently, based on degree of completeness of information, three forms of market efficiency were formulated: 1) Weak-form, 2) Semi-strong and 3) Strong. Each of them is connected with information set which is used by agent in order to get risk-adjusted profit. In other words, weak-form form suggests the prices are reflect all historical data and a getting consistent profit based on past information is impossible, semi-strong form follows the idea that prices are include all public information and only private information is useful in order to get profit, and, finally, strong form states that any information is completely accounted into the financial instruments prices.

1. Source: https://coinmarketcap.com/charts/

2  Source: https://www.cryptocompare.com/

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The main aim of this paper is check whether consistent arbitrage profit exists on the market or not. In the academic environment, this question is very relevant and in demand for study, because the cryptocurrency market itself is relatively new and already has a complex structure, which is supported by the complicated technical features of the asset. Moreover, this research can help the development of the market as a whole, because for the most part, cryptocurrencies are considered illiquid, and exchanges are unreliable in comparison with other assets. Popularization and a wider range of verified information about the market and its features will help solve these problems.
Quite a few high-quality and reliable studies have been conducted on this topic, and the possible reason may be the scarcity of available data. This research checks the market efficiency hypothesis on cryptocurrency market with help relatively huge sample of data.
The first part of this research is devoted to the analysis of theoretical prerequisites for the existence of arbitrage. As stated earlier, there are now three forms of market efficiency: weak, semi-strong, and strong. We focused on the weak form, because if this form is not fulfilled, then the subsequent forms are also violated by definition. Bitcoin daily prices were taken from April 30, 2013 to May 5, 2020 as an object of research . The choice of Bitcoin was due to its great significance for the entire cryptocurrency market and it could be treated as a certain kind of proxy for other currencies. Random walk tests were performed for different types of random processes with adjustment for the trend. Additionally, the data was divided into two periods to achieve more accurate results. This was necessary to take into account potential changes after a strong structural break in Bitcoin prices in the end of 2017 year. If the hypothesis of Bitcoin price predictability is failed to reject, further analysis will be necessary, because, according to the theoretical framework of weak-form efficiency, the arbitrage is possible assuming that markets are perfect, but, in fact, exchange has complex costs and legal structure.
The second part of the research is aimed at studying the potential arbitrage measure in the cryptocurrency market and the ability of costs to explain it. For the analysis, we took aggregated daily data for five currency pairs: BTC / USD, ETH / USD, BCH / USD, LTC / USD, XRP / USD on ten exchanges: 1) OkCoin, 2) Binance, 3) Bitstamp, 4) Bitfinex, 5) Kraken, 6) Bittrex, 7) Huobi Global, 8) OkEx, 9) Cex io, 10) Coinbase. Potential arbitrage measure for different exchanges and currencies were calculated using the PCA approach. Later, data was collected on the cost structure of each exchange and a model was built that tried to show the relationship between costs and potential arbitrage existing on different exchanges. If a strong relationship between these two parameters is

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found, it can be argued that in fact, the arbitrage ability in the cryptocurrency market is much worse than it may seem.
The results mostly support the ideas mentioned above. The random walk hypothesis according to the tests was rejected and this fact provides evidence that predictability of the prices exists. This fact shows the theoretical predisposition of the market to the existence of arbitrage. However, the results of the second part of the work show that the relationships between costs and the estimated parameter that is connected with possible arbitrage on the exchange were identified, and one of the constructed models has a high explanatory power.
The remainder of the paper is following: the first part will contain the review of the most relevant literature, the second part will include description of research framework, the third part will show the data set and its description, the fourth one will include the analysis of RWH in context of Bitcoin prices and will describe the second part of research, which is connected with estimation of potential arbitrage opportunities and modeling of costs structure, and final section will provide the interpretation of the results and the main conclusion.

References

1. I.Choi, Testing the Random Walk Hypothesis for Real Exchange Rates, Journal of Applied Econometrics, Vol. 14, No. 3 (May - Jun., 1999), pp. 293-308.

2. Yukun Liu, Aleh Tsyvinski and Xi Wu, Common Risk Factors in Cryptocurrency, (April 15, 2019).
3. E.F. Fama, Efficient Capital Markets: A Review of Theory and Empirical Work, The Journal of Finance, Vol. 25, No. 2, 1969 (May, 1970), pp. 383-417.

4. J.Hasbrouck, One Security, Many Markets: Determining the Contributions to Price Discovery, The Journal of Finance , Vol. L, No. 4, September 1995, pp. 1175-99.
5. Anne H.Dyhrberg, Sean Foley and Jiri Svec, How investible is Bitcoin? Analyzing the liquidity and transaction costs of Bitcoin markets, Economics Letters, Volume 171, October 2018, pp. 140-143.

6. M.C. Jensen, Some Anomalous Evidence Regarding Market Efficiency, Journal of Financial Economics, Vol. 6, Nos. 2/3 (1978), pp. 95-101.

7. I.T. Jolliffe, Principal Component Analysis, Second Edition, (2002).

8. A.W. Lo, Long-Term Memory in Stock Market Prices, Econometrica, Vol. 59, No. 5 (September, 1991), pp. 1279-1313.
9. Y.Liu and A.Tsyvinski, Risks and Returns of Cryptocurrency, (August 13, 2018).

10. I.Makarov and A.Schoar, Trading and Arbitrage in Cryptocurrency Markets, Journal of Financial Economics, No. 135, (2020), pp. 293–319.
11. G.M.Caporale, L.Gil-Alana and A.Plastun, Persistence in the cryptocurrency market, Research in International Business and Finance, No. 46, (2018), pp. 141–148.

12. G.C.Pieters and S.Vivanco, Financial Regulations and Price Inconsistencies Across Bitcoin Markets, Globalization and Monetary Policy Institute Working Pape, No. 293, 11 Jan 2017, pp. 45.

13. N.Hautsch, C.Scheuch and S.Voigt, Trust Takes Time: Limits to Arbitrage in Decentralized Markets. (November 7, 2019).

14. W.C.Wei, Liquidity and market efficiency in cryptocurrencies, Economics Letters, Volume 168, 2018, pp. 21-24 .