Bitcoin is traded in myriad locations around the world, including numerous exchanges. However, for the most part, the asset trades around the same US dollar value in the market aside from the occasional price movement in some countries from time to time. How is that possible?
There are numerous trading products in the crypto space, including Bitcoin (BTC) futures and options. However, how is the price of actual transaction-ready BTC, known as spot BTC, determined in the crypto market, especially given the large number of exchanges?
“The price of BTC is at no point in time more than a function of the price people are willing to buy or sell BTC at that point in time,” said Justin d’Anethan, sales director at Equos – an exchange for digital assets under the Diginex Group Cointelegraph. “So it will vary – very slightly – from one exchange to another,” he explained, adding:
“Of course, market makers and arbitrageurs will exploit and minimize this difference (sell when it is higher; buy when it is lower so that it corrects naturally). Often, data providers and exchanges themselves use an index as a basis, which is composed of the current price, which is monitored across a selection of different exchanges. ”
Arbitrage is one aspect of the market that helps keep the price of Bitcoin the same on all exchanges. If BTC was trading at $ 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. Transaction timing, exchange restrictions and bots.
Filbfilb, a cryptanalyst 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 volume,” he told Cointelegraph. “They effectively reward people who correct market price differences with a profit,” he added. Filbfilb stated:
“For a high volume dump on exchange, A, which pushes the price above that of exchange B, arbitrage participants will buy the cheaper coins on exchange A and sell them on exchange B at a higher price. This is continued up to price A and B are balanced and the chance is eliminated. This is a simplified example of course, but it literally goes on all the time. “
Arbitrage opportunities also existed between Bitcoin futures and spot trading, according to a strategy once mentioned by Bitcoin stock-to-flow model developer PlanB. The tactic essentially involves short selling BTC futures when buying spot bitcoin.
Certain Bitcoin futures, such as those tradable on the Chicago Mercantile Exchange, sometimes trade above the price of the asset at the beginning of their contract period depending on their expiration and find themselves closer to the spot price of BTC at the time of expiration. However, this system depends on a number of factors, such as the length of the Bitcoin futures contract selected.
“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 referred to as 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 exchanges around the clock. “
Levy noted rapid arbitrage as the force in maintaining comparable BTC prices on various crypto trading platforms.
According to a report by investment firm Wilshire Phoenix, the CME’s BTC futures trading also affects the market price for spot bitcoin. “The results from Wilshire Phoenix […] indicate that CME Bitcoin Futures do more to pricing than the associated spot markets, ”the report said.
The CME opened cash-settled trading in Bitcoin futures 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 based on a number of reasons, including its role as a store of value.
