Bitcoin is traded in myriad locations around the world, including numerous exchanges. However, the asset trades largely around the same US dollar value across the market, barring the occasional price movement in some countries. How is that possible?
There are numerous trading products in the crypto space, including Bitcoin (BTC) futures and options, but how is the price of actual tradable BTC, called spot BTC, determined in the crypto market, especially given the large number of exchanges?
“The price of BTC at any point in time is really just a function of the price people are willing to buy or sell at that point in time,” said Justin d’Anethan, director of sales at Equos – an exchange for digital assets owned by Diginex Group – Cointelegraph. “So it will – very easily – vary from one exchange to another,” he explained, adding:
“Of course, market makers and arbitrageurs take advantage of this difference and minimize it (sell when it is higher; buy when it is lower so that it corrects itself naturally). Data providers and exchanges themselves often use an index as a basis, which is composed of the current price, which is monitored on a selection of different exchanges. “
Arbitrage is one aspect of the market that helps keep the price of Bitcoin similar across exchanges. If BTC was trading for $ 50,000 per coin on one exchange and $ 60,000 on another, people would likely buy BTC for $ 50,000, send it to the other exchange, sell it for $ 60,000 and keep the profit of $ 10,000 per coin. However, a number of factors play a role in arbitrage, such as: B. the transaction timing, stock exchange restrictions and bots.
Filbfilb, a crypto analyst and trader, also sees arbitrage as an important component in determining the spot price of Bitcoin in the market. “In general, arbitrage bots play an important role in eliminating price differentials caused by isolated quantities,” he told Cointelegraph. “They effectively reward people who correct market price variances with profit,” he added. Filbfilb explains:
“A high volume dump on exchange A, which pushes the price above that of exchange B, will result in arbitrage participants buying the cheaper coins on exchange A and selling them on exchange B at a higher price. This will continue until Price A and B are equalized and the chance is eliminated. This is a simplified example, of course, but it literally happens all the time. “
There were also arbitrage opportunities between Bitcoin futures and spot trading, according to a strategy once mentioned by PlanB, the creator of the Bitcoin stock-to-flow model. The tactic essentially involves short selling BTC futures when buying spot bitcoin.
Certain Bitcoin futures, such as those tradable on the Chicago Mercantile Exchange, will sometimes trade above the price of the asset at the beginning of their contract period depending on the expiration date and will be found closer to the BTC spot price until the end of the term. However, this system depends on a number of factors, such as the length of the Bitcoin futures contract chosen.
“Buy orders and sell orders from participants around the world determine the real-time price of Bitcoin,” Rob Levy, co-founder of Hxro – a crypto trading platform – told Cointelegraph. “The markets are all interconnected – from the spot markets to the derivatives markets (futures, options, swaps),” he said, adding:
“The most progressive market participants, often called liquidity providers or market makers, trade simultaneously on all of the world’s most active stock exchanges. The advanced trading systems of high-frequency traders monitor the order books on all major stock exchanges around the clock. “
Levy noted that rapid arbitrage is the power to maintain comparable BTC prices across different crypto trading platforms.
In addition, CME’s BTC futures trading affects the market price of spot bitcoin, according to a report from Wilshire Phoenix, an investment firm. “The findings from Wilshire Phoenix […] indicate that CME Bitcoin Futures contribute more to pricing than the associated spot markets, ”the report said.
The CME opened Bitcoin futures trading with cash settlement in 2017. Together with its BTC futures, the Chicago trading company uses the CME CF Bitcoin Reference Rate – a value for Bitcoin that takes into account data from exchanges on the BTC spot market.
Although certain factors can play a role in standardizing the price of Bitcoin across exchanges, the asset infer its total value for a number of reasons, including its role as a store of value.