Cryptocurrency prices are volatile, and the prices change all the time. In this guide, we break down why cryptocurrency prices are constantly changing and why they are different depending on the exchange you are using.
Firstly, before we begin, it is worth noting that if you are checking crypto prices on a site like CoinMarketCap, it will be different to an actual exchange. This is because CoinMarketCap collates all the data from several exchanges to provide the most rounded price available. However, since it has to process all this data from exchanges, it is never as up to date. Whilst CoinMarketCap is not an exchange, it is a site where you can freely view the prices and market capitalisation of all cryptocurrencies.
Secondly, different exchanges have different price algorithms. This will also be a factor in price listings since some may process faster than others. This isn’t the only reason why prices will differ, but it is something to be noted.
Liquidity refers to the availability of liquid assets to a market or company. In the world of crypto, liquidating an asset means trading it for fiat currency (a national currency). However, the amount you will receive for liquidating an asset will largely depend on the market and exchange.
Trading volume is one aspect that affects liquidity pricing. Trading volume refers to the number of shares (or units of crypto) transacted every day. Since there is a person selling for every one person buying, you can think of trading volume as half of the number of transactions made in a day. So, for example, if one person sells 100 Bitcoin to another person, then the volume would be 100. Naturally, trading volume is much, much larger than 100, though.
If you look at exchanges such as Kraken, BitMEX, Bitfinex, Coinbase Pro, and Gemini, you will see that each one has a different trading volume for Bitcoin. Whilst the Bitcoin price isn’t drastically different across these exchanges, there are slight variations. However, whilst on these exchanges, you will also notice the ‘order book.’
An order book is a collection of live trading that occurs when a trader sets a price that they will buy/sell an asset at. As you can imagine, there are a lot of trades occurring at every moment. This is because the cryptocurrency trading market is open 24/7. Each of these traders will be buying and selling at prices they are speculating, resulting in price movements up and down at all hours of the day.
If liquidity is low overall, the order book will be less stacked. This in turn affects the price of cryptocurrencies as trading volume goes down in tandem. So, remember that if liquidity is down, the prices will be changing.
Whilst there are factors that stem directly from the markets that affect the pricing of assets, the media can also influence them. In particular, if a token gains mainstream attention, there will be a sudden surge in popularity. This then spurs traders to start avidly buying that token, which drives the price up. Equally, the opposite can occur. If a token suddenly gains a bad reputation, and the media publishes criticism everywhere, it can prompt traders to cash out before the price plummets and they lose more money.
The reputation of an exchange can also cause prices to rise or fall. For instance, the Mt Gox incident saw the exchange have to shut down operations after losing a lot of crypto. As well as that, the CEO was also accused of embezzling money from the exchange. This is worth mentioning because in this example, Bitcoin didn’t do anything wrong and yet its price was directly affected by the incident. Because of this, it would be wise to keep your eye on the news to stay ahead of the game.
Arbitrage refers to the simultaneous purchase and sale of an asset to gain profit from an imbalance in price. For example, let’s say you have noticed Bitcoin has a lower price on one exchange compared to another. You may want to take advantage of that. So, you buy the Bitcoin at a lower price, withdraw it, and aim to sell it at a higher price on the other exchange. However, transferring money or assets across exchanges can be inefficient as more often than not, bots typically pounce on any arbitrage possibilities before traders can, or the exchange fixes the price before you’ve had a chance to sell. Do note that arbitrage only exists because of market inefficiencies – if all markets were perfect, it wouldn’t exist.
Since it can be difficult for traders to arbitrage differences, it allows for prices in markets to persist for longer than they would in a more efficient market. This is by no means absolute, since the impact of bots can affect arbitrage, but this is another occurrence that may ultimately affect prices on exchanges.
Government regulation can also affect cryptocurrency prices. This is because the world of crypto is still so new and has been previously unregulated by central authorities. Naturally, centralisation goes against the founding principles of cryptocurrency, but regulation is also needed to adopt crypto into the mainstream for various reasons. One of which is taxation. Delving deep into regulation is an issue for another time, but do be aware that when regulation is involved, prices can move as well.
However, the impact of regulation negotiations may differ depending on the national government involved. This is because taxation laws in China aren’t necessarily going to affect taxation laws in England, for example. But, if price movements are occurring in China, then the price will also move in all markets.
Unfortunately, regulation in the world of crypto has been previously uncharted, meaning it is hard to know how it will affect prices in the future.
There are more reasons why cryptocurrency prices change between exchanges, and this list is by no means exhaustive. If you are looking to get into trading with cryptocurrency, be sure to do your own research as well before committing to any decisions.
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