Why some cryptocurrency exchanges offer prices different from the actual price and How to take advantage

One common question I usually meet is why cryptocurrency exchanges offer different prices from the actual price of an underlying asset. Interestingly, many people are not aware of these disparities in prices among exchanges.

Let us take Bitcoin, for example. As at the 24 June 2019, 10:32 AM (GMT), this was how four different exchanges priced Bitcoin (BTC/USD)

Bitfinex = $10,963

Bitstamp = $10,917

Binance = $10,935

Coinbase = $10,915.

The above-listed figures were the prices of Bitcoin on four leading exchanges on the same day and at the same time. This takes us back to the question, “why do different exchanges have different prices for an underlying asset?”

 (Not just Bitcoin)

Reasons for the Difference in Prices.

One of the reasons why this situation exists in the cryptocurrency market is the lack of a standard price for cryptocurrencies. 

There is no usual price for a digital asset. Bitcoin is not connected to a single exchange, and obviously, all exchanges are not the same. Cryptocurrencies are not backed by gold or any fiat and are not controlled by any centralized authority.

What this means is that there is no agreed pricing system for digital assets. For this reason, exchanges may determine the prices based on their market mechanism or invisible forces.

This brings us to another question, which is, “since there is no standard price for cryptocurrencies, then what determines the price?”

The answer is simple. The trading volume or the interplay of demand and supply of an exchange platform determines the price in a particular moment.

There is no fixed or fair price anywhere. Most of the websites that display cryptocurrency prices including Google show the average or aggregate price from the leading exchanges, whilst the rest pick their feed from Coinbase or maybe CoinmarketCap. 

How to Take Advantage.

Some traders use this strategy, but the profit may not be as huge as you may expect. Checking from the difference in prices in different exchanges as listed above, you can buy Bitcoin or any supported asset at a lower price and sell them at an exchange that offers a higher price for them. However, you should make sure that the percentage difference in prices is not less than the percentage difference in transaction fees.

In other words, make sure the transaction fee and trading fee do not exceed the profit you make from these transactions.

 Some traders also use a software called “Trading Arbitrage” to make profits from the imbalance in the price of a digital asset. You can read about it and start with this trading strategy.