Why do Bitcoin prices differ across exchanges?

26 Mar 2021  Read 1636 Views

Bitcoin trading isn’t exactly a walk in the park. You see, here, the underlying is entirely different. Unlike a stock, you don’t have a company’s performance backing it up. You just have demand and supply; that’s it. And you can’t predict stock prices, let alone bitcoin!

So, this thing you obviously know about bitcoins, that it’s highly volatile. But did you know that the prices of bitcoins are actually different in different exchanges? NO? Well, you’d better know it now. And even if you did, you probably don’t have a clue why it is so. Anyway, don’t worry. We’ll take you through this.

At the outset, here’s a premise on how bitcoins are priced.

Pricing of Bitcoins

Continuing with our discussion, basically, bitcoin prices are a function of demand and supply variables. At any moment, the supply of bitcoins is limited. The supply of bitcoins that can be mined in total is 21 million. Once all of them are mined, it would be exhausted. So essentially, demand is the price-determining factor. And when the supply is limited.. higher the demand, higher is the price and vice-versa.

Now, note how this differs from share prices. No doubt, ultimately, demand and supply determine share prices. But the thing is, when you’re buying a share, you’re ultimately buying a fraction of a company’s pizza. There is this company’s position, its performance, its quarterly results, its management, the industry and the economy as a whole, which can influence the company’s share price. Whereas things aren’t exactly the same with bitcoins and other cryptocurrencies. There it’s just the demand, an irrational exuberance dictated by public sentiments. That’s it. No underlying, no base, nothing.

Anyway, now that you know how bitcoins are priced let’s make an attempt to understand why they differ across exchanges.

Reasons why Bitcoin prices vary across exchanges

To begin with, let’s form a general idea of bitcoin’s price differences across various major exchanges in India (rates as on 25/03/21):

Indian Crypto Exchanges

Price of 1 Bitcoin

WazirX

₹ 4,067,590

Coinbase

₹ 3,829,386

Bitbns

₹ 4,052,001

BuyUcoin

₹ 4,099,557

CoinDCX

₹ 4,060,000

UNOCOIN

₹ 4,097,007

LocalBitcoins

₹ 4,037,237

Well, this is just the Indian scenario. And if such price differences are witnessed within a country, it must be all the more evident in exchanges worldwide.

Coming to the point, there are a number of reasons why these prices of bitcoins are different in different exchanges --

  • Size of the market

Markets across the globe aren’t of the same size. Some markets are big; some are small. So naturally, there would be a difference in the supply as well. And it’s a no brainer that with the demand being constant, lower the supply, higher the prices and vice-versa. That’s precisely why you would see prices of Bitcoins in India higher than its international peers. Because there are very few sellers of bitcoin in this market whereas everyone or the other wants to grab some bitcoins. And when demand outweighs supply, you can’t keep price surge at bay.

  • Exchange volume

The volume of trades also influences bitcoin prices. And these volumes vary with the market size, presence of regulations, etc. You see, the prices of bitcoins are, basically, calculated as an average estimate of previous transactions. And thus, as the volumes differ across exchanges, the prices also differ. Moreover, some big traders (popularly called ‘whales’) also prefer some specific exchanges due to vested interest, and this can influence the volume and price.

  • No common way to price bitcoins

Reiterating the fact, it’s just demand and supply that determine the bitcoin prices. And as these variables differ across exchanges, the prices, too, are different. None knows what bitcoin is supposed to cost. There is no global standard of pricing the cryptocurrencies. By virtue of it being a decentralized digital currency, it is neither pegged to any other currency (eg.:USD, INR, etc.) as such. It just takes its price from the sentiments prevalent in the respective markets.

  • Fees and Taxes

In addition to the raw price of bitcoins, there are also other charges like taxes, transaction fees, margins, etc. And these charges vary from exchange to exchange. This further adds to the heterogeneity in bitcoin prices.

  • Price differences persist longer

This bit is somewhat interesting. So, let’s dive a little deeper.

Let’s try to understand this as a contrast to stock markets. Suppose you hold 10,000 shares of A ltd. in your Demat account. One day, you notice that shares of A ltd were trading at Rs.1001 in NSE and at Rs.1000 in BSE. An amazing idea clicks your mind, and you sell your entire stake of A ltd in NSE at Rs.1001 per share and buy the same in BSE at Rs.1000 per share, straightaway securing a gain of Rs.10,000 (not considering charges). While this may seem very enticing in theory, this is not quite possible in practice. These kinds of opportunities persist for just a fraction of a millisecond and if you’re a retail investor without any algo tools, well, forget it.

These kinds of opportunities are called Arbitrage opportunities, and when the market is efficient, such opportunities go unavailed. And even if such inefficiencies emerge, institutional investors rush in to take advantage of the crack, and before you know, the arbitrage vanishes. Like if the stock prices are high in NSE and the big boys start selling their stakes, obviously, the price will decrease, while their buying counterparts will keep buying in BSE, which will raise the share price. And this way, the spread narrows and arbitrage is eliminated.

But things aren’t the same with Bitcoins. You see, when price differences emerge across exchanges, in the case of bitcoins, investors can hardly take advantage of the opportunity. This is because the transaction fees of taking bitcoins from one exchange to the other are very high, you’ll also have to pay the sending and to receive bank fees, then there will be the exchange rate difference in international transactions, and also there is the requirement of lots of collaterals. There is this invalidating infrastructure issue as well. And all of these become so cumbersome and inefficient that traders are discouraged to avail the opportunity. As a result, the difference in price between exchanges persists longer.

Long story short, as it doesn’t make much economic sense for traders to avail of the arbitrage opportunity, the difference in prices of bitcoins across exchanges lasts even longer.

The bottom line

The crux of the entire matter is that you should be aware of the prices prevalent across various exchanges before purchasing bitcoins, if at all, you’re willing to. However, that should not be the sole deciding factor for you. You must also account for the transaction fees, exchange rates, etc. Choice of exchange should finally be done after comparing the comprehensive price arrived at after considering all associated costs.

However, be mindful not to be blindly influenced by the bitcoin frenzy. This isn’t something you can absolutely nail at, especially as a newbie. Rather first gain knowledge, get trained and only then proceed with the investment. Remember this advice from the notable American investor Peter Lynch --

Invest in what you know.

About the Author: Abhishek Sahoo | 32 Post(s)

Abhishek has a love for numbers and words alike. With a passion for finance and interest in writing, he’s blending both as a Finance Content Writer at Finology. He writes to simplify the toughest of the technical stuff for readers and tries to make the reading exercise interesting. He is a CA Final candidate and aims to pursue a management degree from a top-notch b-school.

Liked What You Just Read? Share this Post:

Finology Blog / Invest / Why do Bitcoin prices differ across exchanges?

Wanna Share your Views on this? Comment here: