Why Cryptocurrency Prices Differ on Exchanges?
Comprehensive Guide to Cryptocurrency Price Differences: Factors, Impact, and Trading Strategies
By reading the article “Difference in a cryptocurrency price” published in Adaas Investment Magazine, you will quickly get acquainted with why CryptoCurrency Prices differ on Exchanges! This level of familiarity can be enough when you need educational information about this topic.
With the daily development of the investment industry in the cryptocurrency market, the demand for platforms that provide services for these digital assets has also increased. For this reason, we see many names of cryptocurrency exchanges, each of which offers unique features.
One of the most important features when choosing an exchange is the final price of buying or selling cryptocurrencies. Many traders and investors are facing this challenge, and below we have examined the reasons for the difference in the price of a cryptocurrency in different exchanges.
Table of Contents
The reasons for the difference in the price of a cryptocurrency in exchanges
The price difference can sometimes have a good result, and in some cases, it can be detrimental to the user. This issue should be reviewed according to the user’s conditions and the possibility of using competing exchanges. In most cases, the type of exchange, pricing policy, and side conditions have a direct effect on the difference in prices.
Of course, you should note that the price difference in the exchanges always reaches the lowest possible value because the momentary increase of arbitrage trades causes the mechanism of these exchanges to interfere and lose many users due to the price difference.
Exchange type and category
Platforms that provide cryptocurrency buying and selling services are divided into three categories, which are:
Large exchanges such as Binance or Coinbase, which are controlled by legal organizations and specify their services for users according to government orders, are called centralized exchanges.
Platforms providing services for buying and selling cryptocurrencies were transferred to a new generation after the design and implementation of the UniSwap exchange. These exchanges are controlled by smart contracts and decentralized autonomous organizations (DAO), which make them decentralized exchanges.
Aggregator of exchanges
A new generation of exchanges has been released to the market. The mechanism of these exchanges is in such a way that according to the user’s trade, this platform finds the best price from other decentralized exchanges and performs the trade, which they introduce as aggregators of exchanges.
The prices of cryptocurrencies are different in various types of exchanges, and usually centralized exchanges offer better prices, but when withdrawing or depositing them, these exchanges have higher fees.
In this way, the user must choose the type of exchange according to his needs. If the intention is to make only a limited number of buy or sell trades, aggregators can provide the best price for them with the least amount of risk.
But on the other hand, if the user intends to make multiple trades as a trader in the cryptocurrency market, centralized exchanges can be a better choice due to lower trade fees.
Each platform follows different policies according to its unique conditions and services. Pricing policies for digital assets are usually subject to the following conditions:
Cash balance of exchanges
All platforms that provide cryptocurrency buying and selling services directly to their users have wallets containing cryptocurrencies listed in the exchange so that they can meet the trading needs of their users when buying or selling through them.
When the balance of the exchange’s treasuries approaches the risk range, the crisis pricing policy is implemented, and thus the price tends either up or down.
Treasury stock is more influential in decentralized exchanges and the price of tradable digital assets in them because liquidity pools are provided by users and when a pool has too many or too few assets, price fluctuations are observed in that exchange.
Supply and demand
One of the most classic and effective conditions of pricing policies is the amount of supply and demand for trades of an asset. This principle can also be extended to the difference in the price of a cryptocurrency in different exchanges.
According to this condition, when the demand for buying increases, due to the access of users to the trades order book, the decision of the sellers tends to higher prices. On the other hand, when the volume of sales orders increases in an exchange, buyers tend to offer lower prices, and as a result, price fluctuations occur in different exchanges.
Prediction algorithms in exchanges
Traders’ behavior and data related to buy and sell orders are always processed by special algorithms. Many large exchanges have algorithmic trading, which increases the number of mistakes made by traders in these exchanges.
In addition to algorithm-based trades, exchanges use prediction algorithms that change the price of an asset according to the results of data processing of buy and sell orders. As a result, users see that the price of an asset in one exchange is lower or higher than in another exchange, and these algorithms are one of the reasons for this price difference.
Side factors influencing the price difference
The things that we have examined so far are the most important reasons for the difference in the price of a cryptocurrency in different exchanges, but there are other reasons that, if they do not have a great impact, are not ineffective either, which include:
Exchange technical issues
Oracles are responsible for connecting blockchains with outside the blockchain environment. One of the services of oracles is to announce the price of cryptocurrencies to blockchains. Now imagine that the oracle, whose services an exchange uses, has errors and delays!
It can be imagined that when there is a big price fluctuation, the occurrence of this interference will cause price differences among the exchanges, and this is one of the technical challenges of the exchanges to keep the prices the same. As a result, other technical issues also have an impact on the price of digital assets in exchanges and it is an important issue.
Obstacles and legal restrictions
When we use centralized exchanges such as Kucoin and Binance, we must note that these exchanges offer various services to their users according to the laws of the host country.
As a result, imagine the time when the service of buying or selling Bitcoin is banned in a country, in this case the selling price of this cryptocurrency will increase unbelievably in the exchanges that operate in these countries. While in other exchanges, the prices do not differ greatly from each other.
This was just one example of the legal hurdles that cause differences in the price of a cryptocurrency in different exchanges. Other big obstacles such as taxes and restrictions on withdrawal from countries also have a direct impact on this price difference.
Market conditions in critical times
When a big event happens in the cryptocurrency market, due to the unexpected increase in requests to the exchange servers, the possibility of interfering with their operation increases.
Imagine the time when the news of the registration of a fake block is published in the Ethereum blockchain. At this time, many exchanges will have a huge price difference for Ethereum cryptocurrency, and this is just one example of the critical conditions of the markets.
The reasons for the difference in the price of a cryptocurrency in different exchanges are a function of many conditions, and one reason alone does not cause a gap in the price difference between exchanges.
This price difference can be used as a profit-making tool, which is arbitrage trades, and it can sometimes cause the liquidation of many trading positions, and it is a very important issue.
The End Words
At Adaas Capital, we hope that by reading this article you will be fully immersed in the reasons for the difference in the price of a cryptocurrency in different exchanges! You can help us improve by sharing this post which is published in Adaas Investment Magazine and help optimize it by submitting your comments.
Is it possible to buy Bitcoin cheaper than exchanges?
Yes, sometimes due to some conditions, a few number of exchanges would sell Bitcoin cheaper than other exchanges!
How to make profits from the difference in the price of a cryptocurrency in different exchanges?
To do this, you need to learn arbitrage trading then you can make money via this issue!