Wednesday, March 27, 2013

Potential arbitrage opportunity in Bitcoin

The recent turmoil in Cyprus seems to accelerated the rapid increase in value of virtual currency Bitcoin.

As a result, the price of mtgoxUSD, the Bitcoin denominated in USD and traded on mtgox, increased by 85% between March 1st and March 26th.

What's more, mtgoxUSD grew by 283% over a year.

Chart: mtgoxUSD price from 2012-03-27 till 2013-03-26, data source: bitcoincharts.com

The annual volume of mtgoxUSD reached 267 million USD (in the meantime, the turnover of mtgoxEUR approached 17 million EUR).

Since mtgoxUSD should equal mtgoxEUR * EURUSD, this raises the question, whether is it possible to find an arbitrage opportunity between these three assets, similar to the one between EURJPY, EURUSD and USDJPY, described in September 2010.

I wasn't able to find adequate information about historical BTC spreads, but based on the EOD data for mtgoxUSD, mtgoxEUR and EURUSD, it seems there may exists pretty consistent difference that may be exploited:

Chart: Potential arbitrage opportunity between mtgoxUSD and mtgoxEUR*EURUSD, EOD data, 1 year

Over the previous year, the differences between mtgoxUSD and mtgoxEUR*EURUSD fluctuated between -4% and +4%, creating potential arbitrage opportunity.

To verify this preliminary observation, one should use historical intraday BTC spreads and EURUSD data.

Some additional information on bitcoin: https://pinboard.in/u:mjaniec/t:bitcoin/


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