why do different bitcoin exchanges have differing prices?

There are a number of factors affecting Bitcoin prices on differing exchanges. Here are some of them:

  • Market size
  • Exchange volume
  • Price of entry

Market size: Relatively speaking, the market for Bitcoins is small. A small market capitalisation means, among other things, that there is less agreement on the price to the BTC. Each exchange is a subset of the larger market, so those markets are even smaller, which causes greater variation.

Exchange Volume: For all the coins that have been mined, the quotes are only from online exchanges, which are a small set of the total coins that have been mined. If only a quarter or less are in play, then the swings can be pretty dramatic. Since the volume is limited, and people don’t take full advantage or arbitrage, different prices can and will exist on the different exchanges.

This happens with foreign currency exchanges too. However, with professional traders, billions of dollars, and serious automated trading the differences are in fractions of a percent.

Price of entry: Compared to other markets It is relatively cheap to enter the Bitcoin market and very cheap to trade them. Furthermore, if you mined or purchased your Bitcoins when it was trading for fractions of a dollar, or even $30 per Bitcoin, most people have no issue unloading it an a non optimum price. With a low price of entry people are less serious about how the trade their BTC.

Fundamentally, the Bitcoin market is a small, highly speculative, irrational market. In addition to that each exchange is a smaller, more highly speculative, more irrational market. That’s why the prices differ so wildly.

As a crude example: Consider two towns in the medieval period separated by twenty miles. They both have their own markets and vendors sell apples at both markets. In the first market the people really like apples. They are willing to pay 2 coins for an apple. In the other market they aren’t such apple enthusiasts and they will only pay 1.5 coins for an apple. The economic thing to do would be to buy the apples in the second market and sell them at the first making a profit of 0.5 coins per apple. But it’s a lot of effort. It’s a twenty mile walk, all of your friends are at the other market. In additon, the prices are not fixed and could change by time you get there. It’s much easier to stick with your current market, even if you’re not maximizing your profits – you are reducing your risks.

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  1. Pingback: Have you ever wondered why bitcoin prices vary from exchange to exchange? | Garry Walkers Website

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