Traders seeking arbitrage opportunities in cryptocurrency markets could be set to drive the next wave of growth in the sector as they seek to capitalize on growing disparities between exchanges.
The process of buying and selling the same commodity on different exchanges to take advantage of price differentials is a well tested strategy in mature markets but with arbitrage opportunities in regulated securities markets becoming harder to find these days, many hedge-funds and traders are now focusing more on cryptocurrency.
Bitcoin is traded on more than 100 exchanges around the globe and hundreds of other currencies trade in venues few people have heard of.
“The market is incredibly irrational right now, and it’s poised for a correction,” Stefan Qin, founder of Virgil Capital, a hedge fund specializing in cryptocurrency arbitrage, said.
In early January, bitcoin and ether, the second-largest cryptocurrency, were trading more than 50% higher in South Korea than in the U.S., although by last week, the gap had narrowed to less than 5%, according to CryptoCompare.com.
At times of heavy bitcoin trading in recent months, price differences between exchanges have widened to 10% or more, or thousands of dollars, and in some cases persisted for days.
BlockTower Capital, a $150 million cryptocurrency hedge fund that does arbitrage trading alongside other strategies, bought at New York-based Gemini and sold on GDAX.
“In November and early December, that price disparity sometimes got to 5%…That’s gigantic,” Ari Paul, chief investment officer at BlockTower Capital, a US$150 million cryptocurrency hedge fund, said.