Alot of my research has been focused on the cryptocurrency market lately. The crypto market is extremely fragmented. coinmarketcap.com lists 853 currencies, and www.cryptocoincharts.info lists a whopping 4,321. Of course the vast majority of these coins do not see a single trade on any given day. Only the top 50 have an average daily traded volume over $1M, and I would argue only the top 10 have any chance of one day becoming widely accepted legal tender.
With the proliferation of currencies we have also seen a blossoming of different exchanges, but again here only a few truly matter. According to coinmarketcap.com, the top exchanges by volume are:
What is interesting about this list is the global distribution. The only major American exchanges that appear are Kraken and GDAX, and Kraken caters primarily to European customers. A few months ago the rapid rise in Bitcoin prices was attributed to buying by Chinese customers, and we see two of the largest Chinese exchanges, OKCoin and Huobi, on the list.
But recent price gains have been caused primarily to South Korean and Japanese interest, and indeed the major Korean exchanges Coinone and Bithumb occupy numbers 2 and 4 on the list. With crypto liquidity spread across so many exchanges and geographies the question naturally arises, are the prices inline? Or is there an opportunity for arbitrage between the exchanges?
At the time of writing, the last trade price of BTC on GDAX was 2,399.98 USD:
At the same time on Korbit (a top 4 South Korean exchange) Bitcoin was trading at 3,102,000 KRW:
At an exchange rate of 0.00089 USD per KRW, this translate to a BTC price of $2,765, an arbitrage of $365.
$365 is more than sufficient to cover exchange execution fees, withdrawal fees, and FX transaction fees, which together amount to a few hundred basis points (at most). The problem an American investor would face attempting to execute this trade would be opening a KRW bank account in South Korea. Most South Korean banks require you to appear at the bank in person with your passport and valid visa to open a bank account. Online transactions are mostly unavailable (see transferwise.com/us/blog/opening-a-bank-account-in-south-korea).
An interesting alternative to trading Bitcoin in South Korea are the Japanese bitcoin exchanges. USDJPY is fully convertible and the second most traded pair in the world after EURUSD. Many global banks offer accounts denominated in JPY.
At the same time BTC was trading around $2,399.98 on GDAX, on BitFlyer (a major Japanese BTC exchange) the price was 273,265.5 JPY. This translates to $2,454.86, an arbitrage of $55. Although not as attractive as the South Korean premium, it is still more than sufficient to cover trading costs and reflects the large demand for BTC in Japan. As with any arbitrage strategy the devil is in the details, and the trader will need to decide if the administrative difficulty of arranging the accounts and cross-border payments is worth it for an opportunity that may prove to be short-lived.