Cryptanalysis: Bitcoin arbitrage a big draw, but pitfalls seem bigger.The spawning of bitcoin exchanges is throwing up big opportunities for arbitrage in prices, of no less than 10-13%.

The spawning of bitcoin exchanges is throwing up big opportunities for arbitrage in prices, of no less than 10-13%. This, even as the government and regulators advise caution on trading in cryptocurrencies. FE counted at least 12-15 peer-to-peer bitcoin transaction platforms, some also offering wallets, that are keen to grab a slice of the growing transaction volumes and offering bitcoins at differential prices. Zebpay, Coinsecure, Koinex, Unocoin, Localbitcoins, Paxful, Etoro, Remitono, ThroughBit, Pocketbits and Bitxoxo are just some of those in the fray. Given the wide choice, exchange shopping has become an option for the smart investor seeking the lowest price. And here we discovered the Trivago of bitcoins, BitcoinRates, which offers a comparison of rates on eight exchanges at one place. It even plots arbitrage charts and displays high arbitrage opportunities for active traders.
For a quick sense of the spreads, the spread between a buy quote at about 3 pm on January 4 between Unocoin (Rs 10,14,290) and Coinsecure (Rs 10,70,001) was 5.5%, while the buy-sell spread (arbitrage trade spread) between Unocoin (Rs 10,16,903) and Bitxoxo (Rs 11,19,875) was over 10%. Speaking on the mystifying variance in rates across platforms, Amod Gupta, who owns and operates BitcoinRates, told FE that the high arbitrage opportunities are a result of how these exchanges function and the activity on the platforms. While Zebpay, he claimed, manages the buy-sell rates through market-making by its own dealers, on some other exchanges like Coinsecure and Koinex, the quotes are driven entirely by individual buyers and sellers. What’s more, fees charged by the exchanges vary from 0% to 0.83% of the transaction value, and this distorts the pricing. Even here, there is a catch. Zebpay, for instance, indicates a 0% fee, but its quoted prices include the fee component, says Gupta.
As a consequence, while a bitcoin with nil fee cost Rs 10,74,050 on Zebpay in the afternoon on January 4, with a 4% fee levy it cost Rs 10,70,700 on Coinsecure. Besides, the prices on Indian exchanges are not very closely aligned with those overseas though they move in tandem, as “it is difficult to buy from there”, says Gupta. Some exchanges also have a transaction-based fee structure, mostly biased towards sellers. Koinex for instance, charges buyers 0.25% for trades of up to Rs 25,00,000 but sellers a lesser 0.20%. The levy drops to 0.15% for trades of Rs 1 crore or more by buyers and to 0.10% for such trades by sellers. And to attract prospective customers, the exchange is running a rewards scheme #letstradecrypto under which it offers `100 to a customer in the wallet for a friend referral. The friend referred also gets Rs 50.

The lack of uniformity in practices of these exchanges is worrying enough (even arbitrage between regional stock exchanges before NSE was born wasn't as risky), but there are more disconcerting signals. For instance, Koinex has an “urgent notice” on its website that reads: “All INR transactions (deposits and withdrawals) have been temporarily halted as instructed by our payment partners. We are working to enable alternate payment mechanisms to resume INR transactions smoothly. We regret the inconvenience caused and request your patience.” And this is not a one-off — Coinsecure has a somewhat different note prominently displayed in a pop-up box that says: “We have a huge backlog on KYCs, so please expect a delay of over 10 days before when we contact you. Do not deposit your INR into Yes Bank. It has been permanently disabled.” It appears that some exchanges have received large number of sign-up requests and can't cope with the traffic and have therefore disabled payments.
While these may be operational issues, it is rare to find sound online businesses shutting down their payment gateways and bank accounts or not having them operational for several days. What's more, there is little knowledge of the net worth or financial capacity of most of these operators. Given that these peer-to-peer exchanges are not regulated, trading on any of these platforms means investors are actually taking on exchange risk in addition to the underlying asset risk. Looked at another way, any investor must attribute a risk premium to the exchange they transact on, in addition to the asset risk. And the exchange risk can vary, based on perception of safety. The government doesn't seem ignorant of the growing risks in the segment with repeated advisories. Finance minister Arun Jaitley warned on Tuesday that bitcoins and other cryptocurrencies are not legal tender and those transacting in them do so at their own risk.
He added that the government was examining the matter and a committee was deliberating over all issues related to cryptocurrencies to propose the actions to be taken. His pre-emptive words come a month after the Reserve Bank of India (RBI) on December 5 repeated its warning of December 2013, “cautioning users, holders and virtual traders of Virtual Currencies, including Bitcoins regarding the potential economic, financial, operational, legal, customer protection and security related risks, associated in dealing with such VCs”. Raghuram Rajan, when he held the office of RBI governor had in February 2014 also expressed concern over the regulation of cryptocurrencies like bitcoin, stating that the virtual nature of these currencies raised questions about their value and advised against transacting in bitcoins as a means of exchange. Legendary investor Warren Buffett at his last annual open meet in Omaha last November had reportedly said, “You can't value bitcoin, because it's not a value-producing asset.” He added that it wasn't possible to say how high it will trade, but that there is “a real bubble in that sort of thing”. That's clearly a message investors need to pay heed to.