Abstract
Studying deviations from covered interest rate parity (CIP) in the Bitcoin/US-Dollar (BTC/USD) market, we find large CIP deviations of up to 15% until Q1/2018. Afterwards, CIP deviations have been subdued, which we attribute to the market entry of high-frequency traders (HFTs). We argue that these market entries have increased efficiency of cryptocurrency markets with respect to CIP as well as liquidity, volatility, and bid-ask spreads. Remarkably, these efficiency gains are larger for the less liquid cryptocurrency Litecoin. Employing a difference-in-differences design, we show that the launch of the BTC/USD future at the Chicago Mercantile Exchange (CME) did not affect market efficiency. Finally, remaining CIP deviations after Q1/2018 seem mostly related to increased credit risk of certain crypto exchanges.
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