Why Does Bitcoin Price Vary Across Exchanges?
Even an altcoin newbie will notice quickly that all cryptocurrency exchanges are not made equal. In fact, bitcoin prices can vary by hundreds of dollars across different exchanges. Why isn’t there a fixed price for bitcoin? There are a few reasons, and they’re essential factors you need to consider when trading bitcoin.
Bitcoin Prices Aren’t Fixed
It’s easy to think bitcoin has a set price, but it doesn’t. In fact, trying to establish a fixed price would be nearly impossible. Bitcoin is designed to be a decentralized currency, so there’s no federal reserve setting any interest rates and no board targeting a specific price. Bitcoin price is entirely determined, at that exact moment, by what somebody is willing to pay for a bitcoin.
This means that while you can get a general idea of pricing, just how much you pay for a bitcoin varies depending on who you’re talking to, which leaves a lot of room to haggle if you’re buying. As a result, different exchanges will have different numbers.
There Is Lots of Liquidity in Bitcoin Prices
Not all exchanges are created equal. Large exchanges will see enormous volumes of trading, and thus will be more liquid than small exchanges. Remember, bitcoin is built on the principle of supply and demand, and as we all learned in high school, the larger the supply, the lower the price. When choosing an exchange, you shouldn’t look solely at trading volume, of course. However, it’s a good idea to get a sense of how the exchange has traded in the past, especially if you’re shopping for the best price on bitcoins.
There Is No Arbitrage
Another factor worth considering is that altcoins lack arbitrage. Arbitrage, if you’re unfamiliar, is a no-risk way to make money by buying an asset on one market and selling it on another at the same time. Since everyone is consistently doing this across markets, it tends to create a form of financial gravity that pulls assets to roughly the same prices. For instance, a share of stock in one exchange will be pulled—thanks to arbitrage—down to its price in another. Since there’s no real infrastructure to share altcoins between exchanges, that means price differences can endure for extended amounts of time, relative to other types of markets.
There Is No Agreement on Fixing This Issue
Again, the decentralization of bitcoin makes it challenging, at best, to lay down one standard for anything beyond the most fundamental aspects of the market. Other assets are traded in a framework set up by some sort of authority, but no such authority exists in altcoin markets. One could even argue that any sort of bitcoin standards authority, even a direct democracy voting on standards with every node logging its vote, violates the free market spirit of the bitcoin experiment. Such an authority may naturally emerge over time, especially if owners of high numbers of coins decide the situation has become untenable. But for now, it’s not on the horizon.
Banks.com offers the latest news on banks and bitcoin as well as valuable tools for financial consumers. If you’re interested in investing in bitcoin or another cryptocurrency, it’s best to get all your finances in order before you start. Get your credit report today!