Bitcoin's Growing Price Gap Between Exchanges Creates Potential Headaches For Futures Trading
Content adapted from this Zerohedge.com article : Source
On Thursday, as the Bitcoin price made record high after record high, spiking to somewhere between $16,000-19,500, it was one of the top stories across mainstream media outlets, never mind Reuters, Bloomberg and the FT.
However, what exactly was the all-time high for Bitcoin? Because of Bitcoin's growing "price gap", it depended where you looked. But a price gap of more than $3,000…really? Actually yes, as Bloomberg explains.
Bitcoin traded above $19,000 on Thursday, but you may have missed it. As it was reaching $19,500 just after 11 a.m. on the GDAX exchange, which is run by the popular bitcoin brokerage firm Coinbase, bitcoin was still stuck in the high $15,000's on other trading platforms. Similarly, most U.S. traders woke up on Thursday to news that bitcoin was above $15,000, unless they were following it on Bitfinex, where it didn't cross $15,000 until soon before 10 a.m.
This is nothing new. Bitcoin trades on dozens of exchanges, and the prices get out of whack at times. But as the price of bitcoin rises more rapidly into the tens of thousands, the gap seems to be getting worse. It was particularly bad on Thursday, when for several hours in the morning the difference between the price of bitcoin on the exchanges remained thousands of dollars, more than the total price of bitcoin just a few months ago.
The chart below compares the price of Bitcoin on two separate exchanges, GDAX and BitStamp, from 12.00am to 5.00pm yesterday.
To some extent, this might not seem to matter, Bloomberg suggests. So what if you could sell at a higher price on GDAX, it's likely that you paid a higher price in the first place. As we discussed yesterday, GDAX is Coinbase's exchange and the higher price probably reflects Coinbase being the easiest way for new Bitcoin investors to participate. And…let's face it, most investors in Bitcoin have been making money. Furthermore, yesterday was an unusual day as the whole world seem to be momentarily gripped by Bitcoin mania. Congestion problems on the Gemini exchange, for example, forced it to suspend redemptions for several hours.
While people might not care about the price divergence right now, they might do in the next few days. As we know only too well, Bitcoin trading is about to change dramatically, with the launch of the CBOE and CME Bitcoin futures contracts. The former starts trading on Sunday after which investors will be able to buy, sell and short the Bitcoin price without having to buy the digital currency itself. Unlike the current Bitcoin exchanges, the futures exchanges are heavily regulated (except when it comes to trading gold and silver, of course).
The intersection of trading on "wild west" Bitcoin exchanges with conventional futures exchanges is a potentially dangerous mix. While the CEO of ICE, which owns the NYSE, has lamented that the CBOE and CME have beaten him in launching Bitcoin products. He also said this week that his organisation wouldn't be offering futures contracts soon due to the lack of transparency and structural integrity in existing Bitcoin markets. Those cautionary words are looking prescient all of a sudden. As Bloomberg notes.
The price gap creates some structural problems for the futures market. Consider hedging. The Cboe and the CME contracts will reference prices on different exchanges. So if investors are trying to hedge a bitcoin purchase, they will have to make sure they buy bitcoins on an exchange that matches up most closely with a particular contract.
But the bigger problem is that the price gap gives some credence to Sprecher's argument. Large price spreads indicate liquidity problems and a lack of active professional dealers or traders who would normally arbitrage these differences away rapidly. Less liquidity suggests prices will drop more quickly when they inevitability do, though not everyone agrees.
Paul Puey, the CEO of Airbitz, a bitcoin wallet company, told me on Thursday that bitcoin's fractured market was a feature, not a bug. If a large trade were to start a tumble in one exchange, the prices would be safe elsewhere, the thinking goes, though I'm not sure I believe that the bitcoin whales wouldn't rush in to sell on a sustained plunge.
On balance, Bloomberg comes down favourably on the introduction of Bitcoin futures trading, expecting it to reduce volatility. However, any conviction is lacking as Bloomberg Gadfly analyst, Stephen Gandel, acknowledges that he might be wrong and it could have the opposite effect.
And more liquidity by way of the futures market should make bitcoin prices less volatile. But it could go the other way, too. A drop in the price could send futures traders heading for the exits, stoking more fears in the traditional bitcoin exchanges. That could create negative feedback loops, like the ones in mortgage markets during the financial crisis. What's more, if there is some pent-up demand to short bitcoin, a rush of traders could cause futures to plunge when they start trading, pushing down the price of bitcoins.
Exactly.
As the clock running down to futures trading, we are waiting to see whether big banks and "official" interventionists launch a pre-emptive strike in a desperate effort to cool the Bitcoin bull market. Whether or not that happens, we aren't convinced that Bitcoin's volatility, or its price, will be tamed for long.
This is not only about bitcoin. many exchanges are showing unreal prices. the most accurate info I have experienced is bloomberg.
I could not imagine that on Thursday, the price of Bitcoin increased at the height of the record. If the price drops slightly then it is starting to grow again. Now I think the previous record will be exceeded soon.
Probably the price spread among different exchanges will simpli ensure operators' trust in the future market price.
When i want to buy or sell BTC, i have to choose not only timing, but also the "good" exchange, because of the difficuity of bitcoin arbitrage. Pure madness!
It really is going to be interesting to see what happens going forward. My first thought is this opens the door for manipulation. We know Wall Street manipulated the gold market (they were caught doing that) and many believe they keep the price of silver down through their manipulation.
The one thing this does add is legitimacy. No longer is bitcoin the total Wild West. There is still a chance that happens but to a lesser degree. At some point, do not be surprised if the major exchanges start to trade the currency itself.
As for the price difference, major arbitrage there which Wall Street will take advantage of.
The introduction of Bitcoin on the stock markets leads to the shutdown of the stock exchanges by Apopulos. Bitcoin's value does not depend solely on stock market speculators and brokers. people simply want to have new gold as assets because in a few years Bitcoin value can reach 1 million dollars. Have a nice day @zer0hedge
In Indian exchanges one btc price is $500-600 more than that of international exchanges
I wonder how much money was made buying on bitstamp and selling on GDAX. I suppose the cost of transactions at the moment might make it only profitable for the whales
yeah i agree with you the prices on coinbase always seems to be higher to me which make buying and selling tricky
i waiting for your new post @zer0hedge. resteemed done @zer0hedge