Cryptocurrency users may have come across the phenomenon known as a “price spread”. As the name somewhat suggests, this spread revolves around the difference between various cryptocurrency prices across multiple trading platforms. Some companies seem more prone to these spreads compared to others. People looking for arbitrage opportunities may want to take a closer look at what a price spread has to offer them.
Why Does The Price Spread Matter?
In the world of cryptocurrency – and all of finance – investors are always looking to get the most bang for their buck. More specifically, they will buy assets and currencies they are interested in at the lowest possible price. This means they need to compare prices across different platforms and exchanges to score the best deal. In a way, the price spread opens up a lot of arbitrage opportunities for experienced traders.
As is the case with any opportunity that can be used for financial gain, it also causes some potential issues along the way. A price spread can be taken advantage of to buy assets and currencies at a lower price, and selling them on a different platform for a profit. That is, assuming one can transfer said funds in a timely manner before the prices have caught up between these specific platforms. That can be quite problematic when it comes to Bitcoin and other cryptocurrencies, as exchanges are not always sending out funds immediately.
Moreover, it can also lead to increased price volatility. If the Bitcoin price on exchange A is $30 higher compared to virtually all other exchanges, people will start to buy cryptocurrency from the lower-priced platforms. These coins are then transferred to the platform where the price is higher, and – hopefully – sold for a profit. This will inevitably result in the latter exchange receiving an influx of new coins being dumped on the market, driving the price down again.
Perhaps the biggest problems is how it can create a skewed representation of the actual value of said asset or currency. Since every financial tool is valued based on an average price taken from multiple platforms, a price spread can result in a slightly higher or lower price compared to what the majority of the market agreed on at that time. To some people, that may not sound like a big problem, even though it is evident representing an inflated or deflated price is not the best way to attract new investors. This is not just native to Bitcoin and cryptocurrency, mind you, but it is especially noticeable in this industry.
Looking at the current Bitcoin price right now, it is not hard to spot the price spread either. Bitstamp has a price that is $40 lower compared to Bitfinex, which puts Bitcoin at $18 less compared to BTC-E. These exchanges are all dealing with USD trades directly and do not represent a conversion rate from a foreign currency. The price spread only grows larger when comparing things to Asian exchanges, where users often pay a 5-15% premium to buy Bitcoin. Once we take all of these spreads into account, one could buy Bitcoin for as low as $2,080 and sell it as high as $2,200 right now. This spread confuses a lot of people, that much is certain.
This does not mean the price spread in finance is all bad, though. Experienced traders will find a way to make money from exploiting this gap in a legal manner. The volatility of affected assets and currencies will not go away anytime soon, though. It is evident the price spread is second nature to anything related to the financial sector, and cryptocurrency is no exception by any means.
If you liked this article, follow us on Twitter @themerklenews and make sure to subscribe to our newsletter to receive the latest bitcoin, cryptocurrency, and technology news.