The Case For Never-Ending Cryptocurrency Arbitrage Spreads

I launched Token Spread in Oct 2017. The project came out of my adventures with different arbitrage strategies in the crypto markets. Two things have happened since the launch of Token Spread, 1) arbitrage spreads have been extremely consistent, and 2) the crypto space has continued to expand at a rate that melts my brain. When I put my head down for a couple weeks to work on new features (like Telegram integration for our spread alerts), I pop my head back out and it feels like the crypto world has passed me by all over again.

In many conversations about arbitrage, there seems to be a common opinion that arbitrage spreads will continue to tighten over time and/or disappear (i.e. be unattainable for the everyday trader).

However, the distributed nature of cryptocurrencies and the natural interplay between availability, security, regulation and anonymity will continue to create persistent market inefficiencies. I am confident that arbitrage opportunities will continue indefinitely due to the following:

1) Staggering regional competition between exchanges.

There has been a gross proliferation of trading exchanges. Regional interests and trends continue to result in predictable arbitrage opportunities and inefficiencies.

At present, the top 10 exchanges on CoinMarketCap based on volume are listed below. This list has changed a lot in 24 months. It will continue to be a revolving door.

1. Upbit
2. Binance
3. Bithumb
4. OKEx
5. Bitfinex
6. Huobi
7. Bittrex
8. HitBTC
9. Kraken
10. GDAX

The current BTC/USD spreads on Token Spread are:

2) Inability of exchanges to keep pace with demand.

Kraken was recently down for 48+ hours while upgrading their trading platform. This is what response times look like post-upgrade:

This is not meant to pick on Kraken, a company that has raised millions in capital, but to illustrate just how hard it is to keep up with demand. It’s very easy to say “let’s start an exchange.” It’s a different thing altogether to achieve a level of scale, stability and super low response times like Etrade or Interactive Brokers.

API connectivity across the major crypto exchanges has proven to be highly unpredictable, without exception. This has been one of the big learnings from building Token Spread.

3) Massive proliferation of individual cryptocurrencies.

There are currently over 50 legitimate contenders for the next best cryptocurrency. While Bitcoin and Ethereum are the clear leaders, there is an arms race for the next best blockchain. Regional influences and the unpredictable addition of new currencies to exchanges around the globe will continue to bring persistent arbitrage opportunities. Because cryptocurrencies are decentralized in nature, with the community able to host its own nodes, there can be no predictable and centralized authority over the global exchanges, protocols, or methods of transfer and remuneration.

4) Security breaches and hacking will continue to destabilize the environment.

NiceHash hacked for $63M in Bitcoin.

CEX breached for 2M in user data.

Mt. Gox hacked or $473M in Bitcoin.

Ethereum DAO hack for $70M in Ethereum.

Bitfinex hacked for $72M in Bitcoin.

CoinDash ICO compromised for $7M in Ethereum.

5) Regulators will not be able to keep pace with the proliferation of exchanges.

Regulation will keep the cryptocurrency environment unstable, with large players being handicapped at random, as we’ve seen with Bitfinex in China and may soon see in South Korea and the United States.

Regulation will also cause exchanges to move to more favorable countries. Moves like this will cause significant disruption.

6) Transferring U.S. Dollars will remain a nightmare.

Wiring large sums of native fiat currencies (like USD, GPB, Euro, etc.) is not fun. It takes a long time. There is no anonymity from local banking systems.

One of the greatest gifts that cryptocurrencies will bring to the global banking system is forcing the institutional players to address the current problems with money transfer. However, this will take a very long time, and the interested parties (Banks and government regulators) are fundamentally incentivized by compliance, transparency and safety, as opposed to speed and anonymity.

7) The future of trading will be peer-to-peer.

Along with greater regulation and transparency will come natural anti-trends. One such trend will be more efficient peer-to-peer trading, or even blockchains whose host nodes support a standardized peer-to-peer trading exchange. In the quest for greater privacy, efficiency and autonomy, the decentralized nature of cryptocurrencies will naturally send many projects deeper into the dark and anonymous web.

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