Bitcoin is one among the most popular cryptocurrencies in the world. Its value has skyrocketed in recent years. However, its price is often different on different exchanges, which is something most people do not fully understand. In this article, we glance at some reasons for this phenomenon.
Firstly, it is essential to understand that Bitcoin is a decentralised currency. Unlike traditional currencies, which central banks control, Bitcoin is traded peer-to-peer, which means anyone can buy or sell it. As a result, the price of Bitcoin is determined by supply and demand on the open market.
However, the supply and demand of Bitcoin may differ on different exchanges due to a variety of factors, such as:
Liquidity
Liquidity is a critical factor that affects the price of Bitcoin on different exchanges. In general, higher liquidity means more buyers and sellers, which leads to a fairer price. When there is more competition between buyers and sellers, there are tighter bid-ask spreads (the difference between the highest price a buyer is willing to pay and the lowest price a seller is willing to accept).
In contrast, lower liquidity can lead to higher price volatility, because there are fewer buyers and sellers to stabilise the price. This can create wider bid-ask spreads, so buyers may have to pay more to acquire Bitcoin, and sellers may receive less for selling Bitcoin.
Market demand
Market demand is another important factor that can impact the price of Bitcoin on different exchanges. If there is high demand for Bitcoin on a particular exchange, the price will likely be higher than on a deal with lower demand. This is because there are more buyers than sellers, meaning buyers are willing to pay a higher price to acquire Bitcoin.
Various factors, including media coverage, market sentiment, and global events, can influence demand for Bitcoin. For example, positive media coverage about Bitcoin can create a buzz around cryptocurrency and increase demand. Similarly, negative news about Bitcoin, such as a major hack or regulatory crackdown can lead to a decrease in the number of orders and a corresponding drop in price.
Regulations
Regulations can impact the price of Bitcoin on different exchanges too. Some countries have strict rules on using Bitcoin, which limits the number of available exchanges. This leads to higher prices on exchanges operating within those regulatory frameworks.
For example, in China, the government has cracked down on Bitcoin trading and mining, causing a decrease in demand for Bitcoin and a corresponding drop in price. Similarly, in the United States, there are strict regulations around Bitcoin exchanges, meaning businesses operating within those regulations may have higher liquidity and price.
Geographical location
Geographical location can play a role in the price of Bitcoin on different exchanges as well. This is because the cost of living can vary widely between countries, impacting the prices buyers and sellers are willing to pay for Bitcoin.
For example, in a country where the cost of living is high, like Switzerland, buyers may likely have more disposable income. Therefore, they may be willing to pay more for Bitcoin. On the flip side, in a country where the cost of living is low, such as India, buyers may be less willing to pay a high price for Bitcoin.
Exchange fees
Another factor that can impact the price of Bitcoin on different exchanges is the exchange fees. Buyers and sellers may be less inclined to use an exchange if the business has high costs, leading to lower liquidity and price. On the other hand, an exchange with low fees may attract more buyers and sellers, which can lead to higher liquidity and price.
Now that you understand the factors that influence the price of Bitcoin on different exchanges, here are some examples of how this works in practice.
Size of the market
The market size is another essential factor that can impact the price of Bitcoin on different exchanges. Larger markets tend to have higher liquidity and more stable prices, while smaller markets can be more volatile and have wider bid-ask spreads. This is because larger markets have more buyers and sellers, so there is more competition and a greater likelihood of finding a buyer or seller at a fair price.
Additionally, the market capitalisation of Bitcoin can impact the price on individual exchanges. If the market capitalisation of Bitcoin is large and growing, it can create positive sentiment around the cryptocurrency and lead to higher demand and prices on all exchanges.
If the market capitalisation is decreasing, it can lead to a decrease in the number of orders and a corresponding drop in price on all exchanges. For example, the Bitcoin market in the United States is generally more prominent than in many other countries, meaning Bitcoin tends to be priced higher on US exchanges.
Example: Coinbase vs Binance
Coinbase is one of the most popular Bitcoin exchanges in the United States. It has high liquidity and is regulated by the US government. Conversely, Binance is a popular exchange in Asia with lower fees, and it is not regulated by the US government.
At the time of writing, the price of Bitcoin on Coinbase was around $27,936, while the price on Binance was around $26,071. This is a significant difference that can be attributed to Coinbase having higher liquidity and being regulated by the US government, making it the more trusted exchange for American buyers.
Conclusion
In conclusion, the price of Bitcoin may vary widely between different exchanges due to a range of factors, including liquidity, market demand, regulations, geographical location, exchange fees, and the size of the market. By understanding these factors and carefully choosing which exchanges to buy and sell Bitcoin on, traders and investors can maximise their profits and minimise risks.
However, it's important to remember that the price of Bitcoin is inherently volatile and subject to change based on a wide range of factors, including global events, media coverage, and market sentiment. Therefore, it's vital to research and stay updated with the latest news and trends, so that you invest carefully and cautiously to avoid significant losses.
Ultimately, the success of your Bitcoin investments will depend on your ability to navigate these complex and ever-changing market conditions.
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Disclaimer
The investment options and stocks mentioned here are not recommendations. Please go through your own due diligence and conduct thorough research before investing. Investment in the securities market is subject to market risks. Please read the Risk Disclosure documents carefully before investing. Past performance of instruments/securities does not indicate their future performance. Due to the price fluctuation risk and the market risk, there is no guarantee that your personal investment objectives will be achieved.