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▼ mtgoxUSD     95.0000  108.452     -12.404%    2428892
▼ btc24EUR     67.5047  89.036      -24.183%    348160
▼ btceUSD      82.9900  106.794     -22.289%    277286
▼ bitstampUSD  75.9900  109.320     -30.489%    249563
▼ mtgoxEUR     74.2244  88.579      -16.205%    248525

So at mtgox it's $95 USD. At btceUSD it's 82. Why the spread is so high?

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I see arbitrage opportunity! :) – Volomike Apr 12 '13 at 14:34
up vote 15 down vote accepted

There are a variety of variables that affect Bitcoin pricing on the exchanges. Some are:

  • Market size
  • Exchange volume
  • Price of entry

Market size: Relatively speaking, the market for Bitcoins is small. In April of 2013 it was about 1.2 billion USD, and a few days later dropped to below 750 million USD. That's a small market cap, which means, among other things, that there's less consensus on the price to the BTC. This is the capitalization for all mined bitcoins and includes coins that have been lost, so the real value is something smaller. Each exchange is a subset of the total market, so those markets are even smaller, which allows for greater variation.

Exchange Volume: For all the coins that have been mined, the quotes are only from online exchanges, which are a small set of the total coins that have been mined. If only a quarter or less are in play, then the swings can be pretty dramatic. Since the volume is limited, and people don't take full advantage or arbitrage, different prices can and will exist on the different exchanges.

This happens with foreign currency exchanges too. However, with professional traders, billions of dollars, and serious automated trading the differences are in fractions of a percent.

Price of entry: It's relatively cheap to enter the BTC market and cheap to trade. Furthermore, if you mined BTC when it was trading for fractions of a dollar, or even $30/BTC, there's no issue unloading it. With a low price of entry people are less serious about how the trade their BTC.

Fundamentally, BTC is a small, highly speculative, irrational market. Each exchange is a small, highly speculative, irrational market. That's why the spread is so great.

As a crude example: Consider two towns in the medieval period separated by twenty miles. They both have markets and people sell apples in both markets. In one market people really like apples. They pay 2 coins for the apples. In another market they aren't as enthusiastic, they only pay 1.5 coins for the apples. The economic thing to do would be to buy the apples in the second market and sell them at the first. But it's hard. It's a twenty mile walk, and all your friends are at the other market. Plus, the price could change by time you get there. It's just easier to stick with your current market, even if you're not maximizing your return.

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In a market exchange, price is determined as being where buy and sell orders meet.

Buyers not needing bitcoins immediately are then most interested in obtaining bitcoins at the lowest price possible. Sellers not needing cash immediately are then most interested in obtaining the highest price as possible.

Because of differences in deposit and withdrawal methods in addition to transaction fee costs and other factors even, exchanges might not be considered equal. Therefore prices between exchanges could vary, significantly. For instance, a seller wanting to unload a large amount of bitcoins would not want to sell on a smaller exchange as that would likely mean dropping the price to meet lower and lower bids. That works against the goal of obtaining a high price.

So the price differences between exchanges are due to these exchange-specific attributes working in either the buyer's or seller's favor.

For instance, because BTC-E provides domestic cash out methods with banks that Mt. Gox doesn't support, sellers in that country (Russia) may be willing to sell at a lower price than at Mt. Gox. If it was trivially easy to transfer funds to BTC-E the price would not vary much from Mt. Gox's price but since there are differences, the lower price at BTC-E is the result.

The prices will generally travel in the same direction and to the same degree, however, they will generally remain different in price between the two pretty much consistently by about the same amount.

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I think, at the moment you took those numbers, MtGox halted trading for several hours, freezing it's price.

Other markets continued trading and their prices went down. That's why MtGox seems to be so high.

The only real difference then is btceUSD and bitstampUSD, with a difference of 7 USD. I'd guess this was due to the fact that those markets are less stable than MtGox. Usually their prices tend to follow MtGox's because people will not be likely to trade at much different prices. But when MtGox went on hold, prices on other exchanges kind of crashed. Probably they just did not crash at the same speed, causing the price of the market with the least volume to decrease faster.

Currently MtGox is trading again and prices stabilized a little. However, it will always be so that (as long as it stays the largest market) MtGox's price will run ahead of the price of the others. The others mostly follow within minutes or hours, but at this time of chaos and wild fluctuations, smaller markets catch up less fast.

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Part of the reason for the recent crash in price is the inability of the markets to deal with the increased number of trades.

When markets aren't working properly it's more difficult to trade to reduce the spread between them.

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