Bitcoin Exchanges - why are the prices so far apart?

sysdevel99 said:
I'm assuming the answer is no but can you arbitrage bitcoin/usd on bitcoin exchanges since they're distributed?

I'm looking at
https://poloniex.com/exchange#usdt_btc
https://www.bitstamp.net/market/tradeview/
They are 4$ apart. Based on what I'm seeing you can sell at one exchange for 910 and buy on another for 906. Are there additional fees (commissions) or do the exchanges make money with the spread only?
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The counterparty risk with these "exchanges" is massive. The difference in price is a pretty accurate reflection of the higher chance the higher price exchange will either fold, be hacked, or in some other way abscond with your money.
 
Sig said:
The counterparty risk with these "exchanges" is massive. The difference in price is a pretty accurate reflection of the higher chance the higher price exchange will either fold, be hacked, or in some other way abscond with your money.
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Not all BTC exchanges are real exchanges. Coinbase is not an exchange but is fairly safe, and yet there is currently a $2 spread with Gemini which is also a safer venue. Keep in mind that Coinbase has traditionally bought coins from Bitstamp and then resold to Coinbase buyers at a small markup. Definitely not a true exchange. But it is a reliable company. As far as I know, they have made good on all customer funds since the company was founded in June 2013. I haven't heard of Gemini absconding with funds either.

The price differences between all of the different venues isn't reflective of of extreme exchange risk. Clarification: there certainly is exchange risk. Most exchanges/venues have been hacked and many are defunct. I think the major price differences are instead caused by the difficulty in buying BTC with government currency whatever that might be. It is almost like a black market item with different markets exhibiting different prices and the difficulty of arbitrage. If for instance a lot of Chinese money wanted to buy BTC, there might easily be $50 spread at the Chinese exchanges over the price at Bitstamp. A person in the US could see this and still not be able to profit on the arbitrage because they couldn't open a Chinese trading account.

BTC "exchanges" or venues are different than what many would think of as a traditional exchange (like a forex broker I would imagine). You don't always need to keep your money there. Many people buy BTC or some other crypto and then immediately move to a private wallet where they are in control of the private keys, so I don't see how exchange risk is so pervasive especially considering their various established reputations.

**edit: by "exchange risk" I mean the bitcoin exchanges or venues not the exchange risk term used in economics. I don't see "counterparty risk" as dire as some as long as one moves the BTC to private wallets ASAP and is in control of the private keys.
 
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m1nt said:
Not all BTC exchanges are real exchanges. Coinbase is not an exchange but is fairly safe, and yet there is currently a $2 spread with Gemini which is also a safer venue. Keep in mind that Coinbase has traditionally bought coins from Bitstamp and then resold to Coinbase buyers at a small markup. Definitely not a true exchange. But it is a reliable company. As far as I know, they have made good on all customer funds since the company was founded in June 2013. I haven't heard of Gemini absconding with funds either.

The price differences between all of the different venues isn't reflective of of extreme exchange risk. Clarification: there certainly is exchange risk. Most exchanges/venues have been hacked and many are defunct. I think the major price differences are instead caused by the difficulty in buying BTC with government currency whatever that might be. It is almost like a black market item with different markets exhibiting different prices and the difficulty of arbitrage. If for instance a lot of Chinese money wanted to buy BTC, there might easily be $50 spread at the Chinese exchanges over the price at Bitstamp. A person in the US could see this and still not be able to profit on the arbitrage because they couldn't open a Chinese trading account.

BTC "exchanges" or venues are different than what many would think of as a traditional exchange (like a forex broker I would imagine). You don't always need to keep your money there. Many people buy BTC or some other crypto and then immediately move to a private wallet where they are in control of the private keys, so I don't see how exchange risk is so pervasive especially considering their various established reputations.

**edit: by "exchange risk" I mean the bitcoin exchanges or venues not the exchange risk term used in economics. I don't see "counterparty risk" as dire as some as long as one moves the BTC to private wallets ASAP and is in control of the private keys.
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If you want to arbitrage between "exchanges" you have to convert your bitcoin to actual currency, then withdraw that currency. That exposes you to the full counterparty risk that that exchange fails during that period. The risk is enormous when compared to the counterparty risk of any normal transaction, pretty much every major bitcoin exchange has failed within a few years of opening. It's almost a matter when, not if. Imagine a world where banks failed like that!
So yes, obviously if there are currency controls in the home country of an exchange it will distort prices, but absent that it's pretty clear that the dodgier "exchanges" persistently have a higher price than those viewed as more stable. You can arbitrage that all day but it's the ultimate picking up nickels in front of a steamroller.
Also, you'll find that the mechanics of arbitrage are pretty onerous. Actually setting up all the real money accounts to move the money, setting up bank accounts in several countries...in the end you end up earning $25/hour for your trouble and putting your entire principal at pretty significant risk.
 
****I just woke up and don't feel the previous post was clear enough.***


The big price differences are because of funding inefficiencies. It is hard in many places in the world to move from state currency to bitcoin. It is also hard or impossible to arbitrage the local price differences. As a result, bitcoin exhibits black market pricing tendencies.

The bitcoin exchanges are frequently not similar to the exchanges one thinks of in traditional markets. Many are more similar to retail stores that buy from wholesalers. Coinbase, for instance, buys btc from Bitstamp and then resells them with a small markup. Due to the US regulations in place, the Coinbase business model is viable versus what would happen in a true unregulated free market where bitcoin would be bought from a true exchange.

There is currently a $2+ spread in the price of btc between Coinbase and Gemini. Both are reliable and established domestic vendors. The spread has zero to do with the risk of either company "absconding." The spread, which will probably be greater in a day or a week from now, is far greater than the actual risk of loss. Good luck on the arbitrage.

One of the great aspects of BTC is limited counterparty risk. Buying at an exchange and then moving the coins to a secure wallet and controlling the private keys reduces risk of loss to only the point of purchase. This is much less risk than trading at a traditional market exchange like, I would imagine, a forex broker. There, one worries about the broker running off with the funds. One might also worry about the entire financial system collapsing if one is so inclined. Bitcoin counterparty risk can be reduced further by buying directly from another btc seller.
 
Sig said:
If you want to arbitrage between "exchanges" you have to convert your bitcoin to actual currency, then withdraw that currency. That exposes you to the full counterparty risk that that exchange fails during that period. The risk is enormous when compared to the counterparty risk of any normal transaction, pretty much every major bitcoin exchange has failed within a few years of opening. It's almost a matter when, not if. Imagine a world where banks failed like that!
So yes, obviously if there are currency controls in the home country of an exchange it will distort prices, but absent that it's pretty clear that the dodgier "exchanges" persistently have a higher price than those viewed as more stable. You can arbitrage that all day but it's the ultimate picking up nickels in front of a steamroller.
Also, you'll find that the mechanics of arbitrage are pretty onerous. Actually setting up all the real money accounts to move the money, setting up bank accounts in several countries...in the end you end up earning $25/hour for your trouble and putting your entire principal at pretty significant risk.
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I only do it as a hobby. Usually it is arbing altcoins on different exchanges in smallish amounts.

I disagree with your odds of ruin. Many or most exchanges have been hacked and lost coins. Some have made good on lost coins. Arbitraging between the reliable ones like Bitstamp has to be fairly low risk of total ruin. The profits from the spreads would be greater than the risk of loss. Of course, you would want to be taking out profits regularly. The greatest risk for a US citizen would be the tax man, the law man and all those suspicious activity reports.
 
m1nt said:
****I just woke up and don't feel the previous post was clear enough.***


The big price differences are because of funding inefficiencies. It is hard in many places in the world to move from state currency to bitcoin. It is also hard or impossible to arbitrage the local price differences. As a result, bitcoin exhibits black market pricing tendencies.

The bitcoin exchanges are frequently not similar to the exchanges one thinks of in traditional markets. Many are more similar to retail stores that buy from wholesalers. Coinbase, for instance, buys btc from Bitstamp and then resells them with a small markup. Due to the US regulations in place, the Coinbase business model is viable versus what would happen in a true unregulated free market where bitcoin would be bought from a true exchange.

There is currently a $2+ spread in the price of btc between Coinbase and Gemini. Both are reliable and established domestic vendors. The spread has zero to do with the risk of either company "absconding." The spread, which will probably be greater in a day or a week from now, is far greater than the actual risk of loss. Good luck on the arbitrage.

One of the great aspects of BTC is limited counterparty risk. Buying at an exchange and then moving the coins to a secure wallet and controlling the private keys reduces risk of loss to only the point of purchase. This is much less risk than trading at a traditional market exchange like, I would imagine, a forex broker. There, one worries about the broker running off with the funds. One might also worry about the entire financial system collapsing if one is so inclined. Bitcoin counterparty risk can be reduced further by buying directly from another btc seller.
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First, the limited counterparty risk applies to holding BTC, not arbing it. If you're arbing you're converting BTC into real currency at Exchange A, withdrawing that currency from Exchange A to your bank, sending that currency to Exchange B, converting it to BTC for probably just as long as it takes for the transaction to confirm, then immediately converting it back to currency at Exchange A to start the loop again. That's a 7-10 day process, during which time your money was stored in BTC for all of 10 minutes and for most of the rest of it you're exposed to the "exchanges" folding.
The terms "reliable" and "established" are quite frankly meaningless when it comes to bitcoin. Mt. Gox was "reliable and established" if you were sitting in 2013. It handled 70% of all bitcoin transactions in 2013 and then it folded suddenly in 2014. The users most certainly did not get all their money back. Then there was Crypto-Trade, Bitcurex, Bitfinex and literally dozens of others who have failed, several in the past year. Every company represents a counterparty risk. IBM has to pay several percent over the risk free rate to get people to lend them money under a bond issuance that makes the creditor first in the credit stack, and they are a company with a 100 year history, audited financials and public reporting. What do you think the market would demand to lend money to Coinbase? And you're an unsecured creditor of Coinbase or Gemini when they shut down, you're at the bottom of the payoff stack. I don't think the bitcoin market fully realizes the risk or even really grasps how counterparty risk works, it's not uncommon to see bitcoin users using terms like "reliable" and "established" to shoo away concerns about counter party risk. However there does seem to be persistent pricing discrepancies against certain exchanges, which would tend to indicate there is a market consensus on their risk (plus structural issues like commissions).
 
Sig said:
First, the limited counterparty risk applies to holding BTC, not arbing it. .
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Why can't I do both and other stuff sometimes too? Why not have a secure core holding and trade with a small bit? Especially if your cost basis is zero or negative.

Mt. Gox was crap. There were a million red flags before the end. You can go back in time and see for yourself on r/bitcoin. Hey, I have been stung for a few coins in the past on some exchanges. Frankly, I was lucky to have not lost anything on Cryptsy and to have not lost that much on BFX and BTC-E.
 
m1nt said:
Why can't I do both and other stuff sometimes too? Why not have a secure core holding and trade with a small bit? Especially if your cost basis is zero or negative.

Mt. Gox was crap. There were a million red flags before the end. You can go back in time and see for yourself on r/bitcoin. Hey, I have been stung for a few coins in the past on some exchanges. Frankly, I was lucky to have not lost anything on Cryptsy and to have not lost that much on BFX and BTC-E.
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You certainly can, it may very well be that the risk adjusted returns are worth it. I'm just pointing out that the risk is there and very real.
 

  1. Pippa Malmgren
    Retweeted
    MarketWatch ‏@MarketWatch 7h7 hours ago
    Bitcoin prices tanked after Chinese authorities said they would begin investigating local bitcoin businesses http://on.mktw.net/2j2i0Jp

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