Law of one price and return on Arbitrage Trading: Bitcoin vs. Ethereum

Decentralized cryptocurrencies are characterized by decentralized trading taking place concurrently at multiple exchanges. Price deviations in two major cryptocurrencies are investigated across six major cryptoexchanges. Trading in both bitcoin and ethereum has become more integrated across different cryptoexchanges since 2018. Bitcoin and ethereum spot many similarities in the behavior of price deviations for any given pair of exchanges and share similar trading dynamics on the same cryptoexchange. Returns on arbitrage trading of bitcoin and of ethereum exhibit very similar dynamics and properties across different cryptoexchanges, as well as over time. Profitable opportunities for arbitrage trading of either cryptocurrency across different cryptoexchanges have declined significantly since 2018. An introduction of a financial derivative traded at a regulated exchange that allows to benefit from decline in the price of bitcoin is found to have a significant impact on the dynamics of trading of both bitcoin and ethereum in the respective decentralized spot markets.