The main point of the paper is to analyze how and why bitcoin price on these three exchanges differs so much, and to state that bitcoin is not really frictionless in this sense. Some of the culprits they point to are volatility, using this graph as a starting point they see the relationship it has between price differentials:
Exchange failure or fraud is another source of risk. Exchange failure is not merely a theoretical possibility in bitcoin markets—it occurs regularly. A study in 2013 reported that eighteen of the forty bitcoin exchanges analyzed—almost half—ultimately failed. Most notable among all bitcoin exchange failures is that ofMt. Gox, an exchange that once commanded the largest share of the market and lost roughly $460 million worth of its users’ bitcoin to hackers in 2014. Counterparty risk could help explain the consistent discount realized on BTC-E. Unlike Bitfinex and Bitstamp, BTC-E does not publish the location of its operations, and little is known about its owners. Such opacity may deter users from using the exchange for greater perceived probability of bankruptcy, which would endanger users’ accounts, or fraud.
Bitcoin-to-bitcoin transactions between digital wallets can be performed at a negligible cost relative to transaction amounts.