Price Dispersion in Bitcoin Exchanges

Bitcoin is traded in a number of exchanges, and there is a large and time-varying price dispersion among them. We identify the sources of price dispersion using a standard time-varying vector auto-regression model with stochastic volatility. Using weekly data over the past 3 years, we find that shocks to transaction fees and bitcoin price growth explain on average 20%, and sometimes more than 60%, of the variation of price dispersion. We argue that the two variables are related to the profitability and risk of trading across the exchanges, and the impulse response functions are consistent with our interpretation