Tag Archives: Arbitrage

Bitcoin, Arbitrage, and the Human Side of the Blockchain

On Bloomberg view, Matt Levine discusses the recent bitcoin fork. The handling of long and short positions on Bitfinex, a bitcoin exchange, created an arbitrage opportunity, until Bitfinex changed its mind.

Bitfinex announced a policy to deal with the fork, people took advantage of the policy, and Bitfinex changed its mind after the fact. Each of its decisions was rational, and quite plausibly the fairest option available to it. None of those decisions were required by, like, the nature of bitcoin, or of short selling: There is no single obviously correct solution to these issues. Instead, each decision was sort of weird and contingent and reversible: not the immutable code of the blockchain, but just humans sitting around and trying to figure out which approach would cause the fewest complaints. …

The blockchain has a certain stark logical completeness, but it doesn’t address all of the actual human uses required of it. And so it has become encrusted with other human institutions. And those institutions turn out to be unsurprisingly human.

Limits of Arbitrage and Covered Interest Parity

In a BIS working paper, Dagfinn Rime, Andreas Schrimpf, and Olav Syrstad analyze the apparent breakdown of covered interest parity (CIP). They argue that

CIP holds remarkably well for most potential arbitrageurs when applying their marginal funding rates. With severe funding liquidity differences, however, it becomes impossible for dealers to quote prices such that CIP holds across the full rate spectrum. A narrow set of global top-tier banks enjoys risk-less arbitrage opportunities as dealers set quotes to avert order flow imbalances.