Why is the price of Bitcoin different across countries?
Today, Bitcoin is valued at $8,700 (13 Nov, 2019). But is it really? Actually, across different exchanges and jurisdictions, the price of Bitcoin varies.
At the core, the reason is due to market inefficiency, which is not that strange considering the novelty of this asset class. Domestic economic performance, people’s overall attitude towards digital currencies in a given place, the quality of exchanges: each of these factors and more influence the price of Bitcoin and cause differences across countries.
But perhaps it’s not just about why it’s like this. More importantly, how can traders take advantage of these differences? This is what we’ll discuss in this post.
Bitcoin at a premium
First off, it’s important to know that while you may often check Coinmarketcap for the latest price of Bitcoin, the price quoted there is not necessarily the price of Bitcoin. Rather, it is the average price of Bitcoin based on data collected from a number of high-volume exchanges that are listed on the website.
You may have heard of the so-called ‘Kimchi premium’, which refers to the higher price of Bitcoin in Korea (especially during the latter part of 2017, when Koreans were investing in Bitcoin en masse).
This is not unique to South Korea. In fact, a recent article by Cointelegraph lists a number of countries where Bitcoin is selling at a premium. Following the prohibition of crypto trading by the People’s Bank of China, many Chinese investors moved over to neighbouring regions such as Hong Kong to buy and sell Bitcoin on over-the-counter trading desks. In Japan, Malaysia, Indonesia, Philippines, Thailand, Chile and Brazil we find similar situations.
In most cases, price surges in local markets follow regulatory changes or economic setbacks. For example, just last week it was reported that while Bitcoin was selling globally at $9,000, in Argentina it was valued at $12,000.
In Argentina, Bitcoin - as well as other cryptocurrencies - is increasingly being used as a safe haven asset. So when the Central Bank took away the freedom to purchase Bitcoin using credit cards, making it more difficult for exchanges to meet the rising demand, the price of Bitcoin surged.
Taking advantage of price differences: Bitcoin arbitrage
The point is that in essence the price of Bitcoin is determined by the market, and while we may rightfully designate Bitcoin as a global currency, there is no single global marketplace. Instead, Bitcoin is traded across hundreds of exchanges, over-the-counter trading desks, and in a peer-to-peer fashion.
Just as in forex markets, and other established markets, market inefficiencies open up a range of opportunities for traders to engage in arbitrage.
For example, you could buy Bitcoin in Hong Kong, transfer the funds to your account at an Argentinian exchange, trade your Bitcoin for USDT (pegged to the US dollar, effectively the same as Hong Kong dollar) and send it back to your first account and cash out the profit.
Another way to take advantage of price divergence is by trading across local currencies. You may find, for example, buying into Bitcoin with Euro, trading it for Hong Kong dollar, and then buying back into Euro may be profitable.
You should know that depositing and withdrawing Bitcoin from one exchange to another incurs fees. More importantly, on some exchanges price differences may actually be the result of market manipulation, so before opening up accounts on some offshore exchange, it will be important to research the exchange beforehand and enquire into its reputation.
Precautions aside, in a way trading arbitrage can have a positive effect on the overall market and if done by a lot of traders may actually drive convergence. If more people buy Bitcoin in jurisdictions where it is selling at a discount, this will drive the price up; whereas selling in places where it is trading at a premium drives the price down.
Never miss a trading opportunity
In our Sparkdex Telegram chat, we have a Bot that issues trade alerts when it spots sizeable arbitrage opportunities between LocalBitcoins and Sparkdex. Find out how this works here.