Bitcoin trading isn’t for the faint of heart. As you can see, the underlying issue is quite different. You don’t have the backing of a company’s performance as you do with a stock. There are only two factors: supply and demand. And even the price of bitcoin cannot be predicted!
So, you’re probably aware of the fact that bitcoins are extremely volatile. But did you know that the price of bitcoin varies depending on which exchange you use? NO? You had better understand it by now. Even if you did, you probably have no idea why this is the case. Anyway, don’t be concerned. We’ll walk you through the process.
Let’s start with a hypothesis about how bitcoins are priced.
Pricing of Bitcoins
To continue our explanation, bitcoin prices are essentially a function of demand and supply variables. The supply of bitcoins is finite at any given time. There are a total of 21 million bitcoins available for mining. It would be depleted once all of them had been extracted. Therefore, demand effectively sets the price. When there is a limited supply, the higher the demand, the higher the price, and vice versa.
Take note of how this differs from the price of a stock. Without a question, supply and demand ultimately decide share prices. The fact is that when you purchase a share, you are actually purchasing a small portion of the pizza that a company makes.
This company’s position, performance, quarterly results, management, industry, and overall economy all have the potential to influence the share price. However, with bitcoins and other cryptocurrencies, things aren’t precisely the same. There, all that exists is the demand, an excitement driven solely by popular opinion. That is all there is to it. nothing beneath, nothing to build on.
Anyway, now that you are aware of how bitcoins are valued, let’s try to comprehend why prices vary between exchanges.
To get to the point, there are a lot of explanations for why bitcoin prices vary across exchanges:
Exchange volume
Bitcoin prices are also influenced by the number of trades. And these volumes change depending on factors like market size, the presence of laws, etc. Bitcoin prices are, in essence, calculated as an average estimate of previous transactions. As a result, prices differ among exchanges due to volume differences. Additionally, some large traders (affectionately known as “whales”) choose some particular exchanges due to vested interests, which can affect the volume and pricing.
Size of the market
The size of markets varies greatly around the world. There are large and small markets. As a result, there would be a supply discrepancy as well. Furthermore, it stands to reason that, with consistent demand, a decrease in supply will result in an increase in price and vice versa. The price of Bitcoins in India is higher than its international counterparts exactly because of this. Because there aren’t many people in this market selling bitcoin, everyone wants to buy some. And you can’t put a price rise at bay when demand outweighs supply.
Fees and Taxes
Other expenses, including as taxes, transaction fees, and margins, are added to the raw price of bitcoins. Additionally, these fees differ from exchange to exchange. This significantly increases the price heterogeneity of bitcoin.
No common way to price bitcoins
It bears repeating that supply and demand alone influence bitcoin pricing. Additionally, because these factors vary between exchanges, so does the pricing. Nobody is aware of the supposed price of bitcoin. The prices of cryptocurrencies are not standardized everywhere. It is not pegged to any other currency (e.g., USD, INR, etc.) because it is a decentralized digital money. It just calculates its price based on the current market emotions.
Price differences persist longer
This is an intriguing segment. So, let’s take a closer look.
In order to better grasp this, let’s compare it to stock markets. Assume you have 10,000 A ltd. shares in your Demat account. You observe one day that shares of A Ltd were trading at Rs. 1001 on the NSE and Rs. 1000 on the BSE. You have a brilliant idea, so you immediately secure a gain of Rs. 10,000 by selling all of your shares of A Ltd. in the NSE at Rs. 1001 per share and purchasing them in the BSE at Rs. 1000 per share (not considering charges). While this can sound very alluring in principle, it is not really feasible in reality.
When price discrepancies between exchanges occur, as they do in the case of bitcoins, investors are unable to take advantage of the opportunity. This is due to the high transaction fees of moving bitcoins from one exchange to another, as well as the need to pay sending and receiving bank fees, the exchange rate difference in international transactions, and the demand of a large amount of collateral. There is also the problem of invalidating infrastructure. Additionally, all of them become so onerous and ineffective that traders are deterred from taking advantage of the chance. As a result, the price differential between exchanges continues for a longer period of time.
The disparity in bitcoin pricing between exchanges lasts much longer since it is not economically advantageous for traders to take advantage of the arbitrage opportunity.
