The world is fixated on the price of bitcoin, clearly because of its breathtaking rise and fall in the last year or so. The problem is, if you look closely, you will notice that different exchanges quote different prices for bitcoin (BTC
BTC
U.S. Exchanges Have Different BTC Prices
BTC Prices Based on Exchanges
Why Are Prices Different?
Like anything else, the price of bitcoin is a function of its supply and demand. In a frictionless world where everybody has the exact same information at the same time and all liquidity can be centrally-pooled, the two would meet at a singular equilibrium. However, the bitcoin (or any other crypto) market is rife with sources of friction.
For instance, order book depth and liquidity can and does vary between exchanges and even trading pairs on a single exchange. If a particular exchange has shallow depth, it cannot absorb large orders without experiencing significant price slippage.
Despite its growth over the past few years, the crypto market remains far more fragmented than the traditional financial sector. This makes it difficult (but not impossible) for arbitrageurs to move money around the world and take advantage of price discrepancies, which would ultimately bring prices back inline. One of the best examples of this fact is the “Kimchi Premium,” which represents the difference in price between bitcoin on Korean exchanges and the rest of the world, which tends to be a bit less correlated with the rest of the market as a result of relatively limited investment opportunities for the retail traders in the country. Historically it has seen some substantial volatility. For instance, during the height of the ICO craze back in 2017 the premium reached 40%. It also surged during the bull market in the spring of 2021. However, if you look at the chart today it is far more muted.
BTC: Korean Premium Index
Korean BTC Premium Index
Additionally, sometimes exchanges become first movers (in either direction) due to specific market positioning. For instance, Coinbase has become a destination of choice for institutional buyers. Therefore, crypto watchers (bitcoin in particular) have started to pay special attention to movements in the price on Coinbase, as it can signal whether or not institutions are buying or selling the asset. These observations can provide directional guidance to traders. In fact, it has become popular to track the difference in price between Coinbase and Binance (which is synonymous with retail traders). Based on this chart, you can see that it has recently turned negative, suggesting that bitcoin could be facing some downward pressure. CryptoQuant calls it the Coinbase Premium Index.
BTC: Coinbase Premium Index
BTC: Coinbase Premium Index
That said, this is just the start as these observations come from directly looking at prices on exchanges.
Non-traders will get a different number when they search on Google for the price, and adding further to the complexity is the fact that many indexes and reference rates have their own unique ways of calculating the price that underline the price of various exchange-traded products and other financial products.
Finally, this article only discusses prices denominated in USD or USDT
USDT
Why It Matters
Although there will likely never be a singular price of bitcoin because markets inevitably have friction, just like there is no one price of gold, it is important to keep working towards a convergence of market prices. Wide discrepancies in prices are a symptom of inefficient and immature markets. The more evenly-distributed liquidity is in the world, the less susceptible it will be to allegations of fraud and manipulation, which will create a more equal playing field for all investors. This could help get a bitcoin ETF over the finish line in the U.S.
A little variance is manageable, a lot needs to be reduced.
