Triangular No‐arbitrage Estimation through Bitcoin: An Application in Venezuelan Bolivars

Abstract

Abstract In this study, we apply the Bitcoin to estimate the price of the Venezuelan bolivar, due to the unreliability of this currency's official exchange rate. Our approach is based on the triangular no‐arbitrage condition and takes the Bitcoin as an intermediate currency. To verify its validity, in addition to bolivars, six currencies are first considered in the empirical study. We find that trading through the Bitcoin market produces higher transaction costs or requires higher risk compensation than trading through the conventional exchange market. Then, we explore the Venezuelan case. Comparing the estimates of the black market bolivars, which are generated from several popular media sources and the Web site Dolartoday.com, using Bitcoin can produce reliable bolivar exchange rates quickly and easily. To sum up, we verify the feasibility of using the triangular no‐arbitrage condition in foreign exchange markets to estimate exchange rates through the Bitcoin. This is especially useful when capital controls exist such as they do in Venezuela.