Two analysts from the New York Federal Reserve Bank examined bitcoin price issues on major cryptocurrency exchanges.

Alexander Kroeger, a research analyst in the Federal Reserve Bank of New York’s Research and Statistics Group, and Asani Sarkar, an assistant vice president in the Federal Reserve Bank of New York’s Integrated Policy Analysis Group have conducted an analysis of bitcoin price in a new report, entitled “Is Bitcoin Really Frictionless”.

According to the researchers, there are significant frictions when bitcoins trade on exchanges, what leads to price differences across cryptocurrency exchanges.

“These exchange-related frictions reduce the incentive of market participants to use bitcoin as a payments alternative,” Alexander Kroeger and Asani Sarkar from the Federal Reserve Bank wrote in the paper.

The authors argue that the prices of bitcoin should be equal, as every bitcoin bought on one exchange is identical to a bitcoin purchased on the other exchange. Any differences in bitcoin value should be removed by arbitrageurs acquiring bitcoin where it is cheaper and selling it at a higher price on the other exchange.

The analysts investigated bitcoin price on three of the world’s largest exchange markets: Bitstamp, Bitfinex and BTC-e. “The average difference is positive, indicating that bitcoins bought on BTC-E consistently trade at a discount relative to those bought on either Bitfinex or Bitstamp. This discount averages about 2 percent and has at times been higher than 20 percent,” the paper reads.

The price differences are also explained by transaction fees, what minimizes the profit from arbitrage. For instance, BTC-e charges between 0.2 and 0.5% fee per transaction, including additional fees for depositing and withdrawing traditional currency. Bitstamp and Bitfinex take  percentage trading fees, as well as withdrawal and deposit fees.

According to the analysts, there are two main risks for bitcoin arbitrageurs: delays in transactions and the possibility of fraud or exchange failure. The largest delay is observed when transferring US dollars to the exchange. To buy bitcoin on BTC-e, arbitrageur needs to wait from five to ten days until the deposit via wire transfer is completed. There is a high risk that the price will be changed during that period.

Another delay occurs when transferring bitcoin from BTC-E to Bitfinex and Bitstamp. Depositing bitcoin requires three network confirmations, taking ten minutes each. This increases the delay between the bitcoin acquisition and its deposit on Bitstamp or Bitfinex to thirty minutes. The delay, the authors note, can be reduced by short selling, but it is available only on Bitfinex and implies additional fees.

Exchange failure, meantime, is not uncommon on bitcoin markets. A report, developed in 2013, showed that 18 of the 40 exchanges examined finally failed.

Given the fact that bitcoin is not legally a unit of account, people need to convert it to traditional currency when using on exchanges, what creates inter-exchange price uncertainty.

“This price uncertainty, in turn, inhibits the use of bitcoin as a store of value. Thus, while bitcoin may continue to develop as an alternative means of payment, it competes with more traditional value-transfer methods on a familiar playing field—offering transfers with lower fees relative to transaction risk,” the paper concluded.

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