Why Do Crypto Exchanges Have Different Prices?Last Updated on July 14, 2023 by Kevin Groves
Cryptocurrency exchanges are one of the essential building blocks in the crypto market – investors can buy, sell, and exchange digital assets on these platforms. Most crypto exchanges provide even more investment-oriented services, allowing investors to earn passive income on their crypto holdings.
But, when it comes to crypto trading, crypto prices differ from exchange to exchange.
Why do prices differ per exchange? This article will cover some of the key reasons behind price differences and how to select the best Bitcoin exchange for you.
Why does the price of crypto differ on exchanges?
Without a central authority to regulate or fix a global standard for cryptocurrencies, differences in price have emerged between the different platforms that allow the buying and selling of digital currencies. The differences in the price of each exchange are a result of supply and demand metrics with the most influential factor being the trading volume and liquidity.
Speculation by users on each exchange drives the prices against fiat currencies and other altcoins. The larger exchanges with deeper liquidity and trading activity have more efficient price efficiency compared to smaller exchanges. The difference in prices between exchanges presents an opportunity for crypto arbitrage trading.
Key reasons why crypto prices are different
The price of cryptocurrencies offered by crypto exchanges differs due to several factors that are explained below:
1. Volume of the Exchange
The first determinant of cryptocurrency exchange difference prices is the volume of cryptocurrency processed daily. Popular cryptocurrency exchanges typically command higher exchange volumes. This is largely due to the law of supply and demand, as more investors are executing trades on them. The trade volume of a crypto asset on an exchange determines the coin’s price movement.
But this is not usually the case with smaller exchanges as they have lower volumes. This often sees the prices quoted for their crypto asset lag behind their larger counterparts.
Given this, arbitrage opportunities easily abound in the crypto market as arbitrage traders can purchase large quantities of an asset from a small-volume platform and sell for a higher price on a more robust exchange.
If this is done effectively, the price differences due to increased demand for the asset would see its traded volume almost on par with other exchanges.
For example, an exchange like Binance has a higher Bitcoin trading volume than smaller exchanges. A greater transaction volume allows for fair cryptocurrency prices and eliminates distorted pricing faced by smaller exchanges with fewer trading volumes.
Liquidity is an important concept in the crypto industry. It emphasises the ease with which investors can convert their assets into cash with little difficulty. An exchange with much less liquidity could witness more price fluctuations than an established exchange with greater liquidity.
High liquidity creates stability in the market. Stable crypto exchanges with high liquidity are also immune to sudden price swings, except in extreme cases. The liquidity levels create an equilibrium market price (bid-ask spread) acceptable to buyers and sellers.
When trading, sellers set an ask (selling) price for a cryptocurrency, and buyers set a bid (buying) price. The bid-ask spread is the difference between the highest price a buyer is willing to pay (bid) and the lowest price a seller accepts (ask) for a coin.
A transaction cannot be completed without a buyer accepting a seller’s lowest asking price. An exchange’s spread determines its liquidity. Tighter bid-ask spreads are a measure of greater liquidity, while a wider spread means a less liquid market.
Exchanges like Coinbase and FTX with tighter spreads have more liquidity because they complete more transactions in little time. In other words, the low liquidity and high volatility on smaller exchanges usually result in price spikes. But an exchange with high liquidity will have a more stable market with lesser price fluctuations.
3. Fees Charged
Customers pay crypto platforms a fee for using their services. This ranges from the trading, deposit, trading and withdrawal fees. Of all these fees, trading fees impact the final crypto prices the most.
While cryptocurrency exchanges usually charge a flat fee or a percentage of the transaction total, crypto brokers charge a bid price or a spread for the final price.
For instance, Binance and Coinbase charge a flat fee of 0.1% and 0.5%, respectively, while social trading crypto broker eToro charges 1% as a spread fee. Usually, these fees and spreads are not shown in the coin’s price but are added to the final transaction value. So, traders get less value after the transaction fees are factored into the transaction.
Also, exchanges have maker-taker fees to improve market liquidity. The maker-taker model differentiates orders that add liquidity to the market (called maker orders) and orders that remove liquidity from the market (called taker orders).
So, when a buyer places an order on an exchange and the trade is executed immediately, the trader removes liquidity from the market and pays a taker fee. Eventually, the buyer and seller may get an incentive (maker/taker fee) for adding liquidity to the market.
Exchanges allow Market Makers to create limit orders, wait for them to be completed, and sell them to the highest bidder. At the same time, Market Takers must place multiple orders to have their orders completed immediately. Limit orders affect the exchange’s liquidity and cause a coin’s price fluctuations.
Traders will opt for exchanges with low fees, exciting incentives, high transaction volume and liquidity. And this results in price differences between multiple cryptocurrency trading platforms.
4. No Standard Pricing
Cryptocurrencies are decentralised which means, unlike stocks and other real-world assets, no authority or entity controls the prices of crypto assets. Since there is no standard or global price for cryptocurrencies, different exchanges can set different trading prices based on their metric of choice.
Usually, this involves using price trackers to gather the data of previous Bitcoin transactions on well-known exchanges and calculating an average estimated price based on the data.
For example, Google generates its Bitcoin prices using Coinbase’s data. Other search engines leverage APIs from different platforms and eventually arrive at the various coin prices investors see online. Some exchanges also generate their prices from multiple sources using this method, which is why they have discrepancies in the prices of similar coins.
How Do Exchanges Calculate Crypto Prices?
Digital asset prices vary slightly across the market. Because exchanges use data from recent trades, they do not exactly set the price of cryptocurrencies. They utilise the average prices of active deals across key exchanges to determine a coin’s price per time.
Exchanges also use a coin’s most recent bid/ask price to determine its price. This is why prices fluctuate from time to time.
Cryptocurrency exchanges are the lubricant in the crypto engine and the rhetorical cog in the wheel. However, different fee structures have left many investors perplexed about which is best for them.
This article explored why this phenomenon has taken hold in crypto and how investors can choose the best cryptocurrency exchanges.
The first step towards overcoming this hurdle is determining the kind of trader you want to become and only selecting an exchange based on your particular needs.
Warren is the co-founder of CoinCryption. He has a passion for cryptocurrency and has been involved in this space for more than 7 years. His other love is digital marketing and has over 15 years of experience.