The price spread revolves around the difference between various cryptocurrency prices across multiple trading platforms. Price spreads can actually have a significant impact on the volatility of prices across the market, while also potentially skewing the representation of what a currency is really valued at.
What Is a Price Spread?
The price spread can be taken advantage of to buy assets and currencies at a lower price, and selling them on a different platform for a profit. That is, assuming one can transfer said funds in a timely manner before the prices have caught up between these specific platforms. That can be quite problematic when it comes to Bitcoin and other cryptocurrencies, as exchanges are not always sending out funds immediately.
Why Do Price Spreads Exist?
The spread - the difference between the buy and sell price - on foreign currency trades will be a few pennies at the most, while spreads on cryptocurrency trades can be as high as a few dollars.This is because you have the opportunity to purchase certain coins from more than one exchange, each of which may have a differing price for what that coins is being traded at. As such, the asking price (bid) may differ from the selling price which can cause overall portfolio returns to differ from what you may have expected.
How Do Price Spreads Affect the Market?
Although it may seem a bit trivial, price spreads can actually significantly affect the crypto market in a number of ways. First of all, it can lead to increased price volatility. If the Bitcoin price on one exchange is $30 higher compared to virtually all other exchanges, people will start to buy cryptocurrency from the lower-priced platforms. These coins are then transferred to the platform where the price is higher and sold for a profit. This will inevitably result in the latter exchange receiving an influx of new coins being dumped on the market, driving the price down again.
Ultimately, price spreads are a key component of how the market functions as a whole. Relying on underlying supply and demand principles, price spreads are apparent and should definitely be taken into account by anyone who plans on investing in and trading cryptocurrency.