Bitcoin arbitrage and exchange default risk

Abstract

We investigate how exchange default risk and liquidity affect Bitcoin cross-exchange arbitrage opportunities. Analyzing minute-level data from 16 cryptocurrency exchanges (April 2013–April 2024), we find arbitrage opportunities last longer when higher-risk exchanges have higher prices, as traders are cautious of default risks. There is a strong positive relation between capital flows from high-risk to low-risk exchanges and arbitrage opportunities, showing a preference for safer exchanges. Liquidity accelerates arbitrage by enabling faster execution, but high transaction fees and blockchain congestion slow capital transfers. The paper highlights exchange risk, liquidity, and transaction costs as key factors in Bitcoin market efficiency. • Exchange default risk significantly impacts Bitcoin cross-exchange arbitrage behaviour. • Arbitrage is more persistent when high-risk exchanges have higher prices. • Higher liquidity enhances the effect of net flows on Bitcoin arbitrage opportunities. • Blockchain congestion and fees hinder capital movement, slowing arbitrage execution.