Bitcoin is traded in countless places around the world, including many exchanges. However, the asset is traded in the market at roughly the same USD value, despite the fact that in some countries distant price movements occur from time to time. How is this possible?
There are many trading products in the cryptocurrency area, including bitcoin futures and options (BTC), but how is the actual price of a BTC transaction called Spot BTC determined in the cryptocurrency market, especially given the large number of exchanges?
“The price of BTC at any given time is nothing more than a function of the price that people are willing to buy or sell BTC at that time,” said Justin d’Anetan, Sales Director of Equos – Diginex Group’s Digital Asset Exchange. – Cointelegraph. He explained: “This is why it will vary – very little – from one exchange to another,” he added:
“Of course, market makers and arbitrageurs will use this spread and limit it (by selling when it is higher, buying when it is lower, so this is corrected naturally).” Data providers and exchanges often use an indicator as a basis, which consists of the current tracking price. Through a group of different exchanges. ”
Arbitrage is an aspect of the market that helps keep Bitcoin prices consistent across different exchanges. If BTC traded at $ 50,000 per currency on one exchange and $ 60,000 on another, people would most likely buy BTC for $ 50,000, send it to another exchange, sell for $ 60,000 and make money. in the amount of $ 10,000 per currency. There are a number of factors that play a role in arbitration, such as transaction times, exchange restrictions and robotics.
Philbfilb, a cryptanalyst and trader, considers arbitrage to be an important component in determining the spot price of bitcoin in the market. “Overall, arbitrage robots play an important role in eliminating spreads due to isolated volume,” he told Cointelegraph. “They effectively reward people who correct fluctuations in market prices with profit,” he added. Philbfilb explained:
A large unloading on one of the stock exchanges, A, which pushes the price below the exchange rate to B, will lead to the arbitrators buying cheaper coins in stock A and selling them at a higher price in stock B. This will continue until then. as long as price A and equation B AND the possibility are excluded. Obviously this is a simplified example, but it happens literally all the time. ”
There are also arbitrage opportunities between bitcoin futures and spot trading, following the strategy previously mentioned by the creator of the bitcoin flow model PlanB. This tactic mainly involves short selling bitcoin futures while buying spot bitcoin.
Some Bitcoin futures contracts, such as those traded on the Chicago Mercantile Exchange, sometimes trade over the asset’s price closer to the beginning of the contract period, depending on the expiration date, and are then closer to the BTC spot price. . expiration date. This scheme depends on a number of factors, such as the length of the selected Bitcoin futures contract.
“Buying and selling orders from participants around the world determine the price of bitcoin in real time,” Rob Levy, co-founder of Hxro, a cryptocurrency trading platform, told Cointelegraph. “All markets are interconnected – from spot to derivatives markets (futures, options, swaps),” he said, adding:
The most advanced market participants, often referred to as liquidity providers or market producers, trade simultaneously on all the most active stock exchanges around the world. Advanced trading systems created by frequent traders monitor order books on all major exchanges around the clock.
Levy notes that rapid arbitrage is the strength that keeps Bitcoin prices comparable across different cryptocurrency trading platforms.
In addition, Bitcoin futures trading on the Chicago Mercantile Exchange affects the market price of spot bitcoins, according to a report from Wilshire Phoenix Investment Corporation. “The results from Wilshire Phoenix […] indicate that CME Bitcoin Futures contributes more to price discovery than similar spot markets,” the report states.
The Chicago Mercantile Exchange opened bitcoin cash-settled futures in 2017. Together with bitcoin futures, the Chicago-based trading organization CME CF uses the bitcoin reference price – the value of bitcoins based on data from exchanges on the BTC spot market.
In general, while certain factors may play a role in consolidating Bitcoin’s price on exchanges, the total value of an asset is determined based on a number of rationalities, including its role as a store of value.