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Bitcoin Cross-Exchange Spreads Reach 16-Month High

After months of customer difficulty at Mt. Gox, bitcoin’s leading exchange by volume, price differentials between exchanges have risen to the same levels seen during the mid-April bubble. The last time the differential was higher was when BTC was trading at $4.90 in March 2012.

Price differential 16mo high 2

Since early May, Tokyo-based Mt. Gox has encountered a number of issues affecting the capital flow in and out of their exchange. After falling victim to a series of denial of service attacks in April, the Department of Homeland Security seized the U.S. bank account Mt. Gox used for at least one of their major payment processors in mid-May, hindering many potential or existing customers from moving capital in or out of exchange accounts. More recently on June 20, Gox put a halt on all USD withdrawals, citing difficulties their bank was having processing large transaction volumes.

Exchange rates

Historically, spreads would climb as event-driven trading drove markets, before eventually returning to standard levels that matched the difference in cost of funding accounts at different exchanges. This time, the withdrawal issues with Mt. Gox have persisted for more than a month, driving the longer-term average price differential up to a sustained, elevated level. Highlighting this is the shorter 10-day moving average spread, which trended downwards leading up to the date when Mt. Gox was expected to reinstate withdrawals, before quickly bouncing back up on the news that there would be further delays.

short vs med term differential

The implications of these events for the bitcoin market in general are significant. In particular, micro events continue to weigh heavily on trading activity. Despite the abundance of new businesses, global interest, venture capital, and macroeconomic data, the markets are still influenced largely by news from a single exchange. The price differential across exchanges and overall trading volume trended together through late April, before switching to moving inversely as the multitude of issues at Mt. Gox arose. As capital flow to a major exchange is hindered, true price discovery is reduced and the willingness to buy BTC at whatever price is necessary to move capital of that exchange increases. The degree to which that is affecting markets has risen to historically high levels

volume vs price differential

Fortunately, a number of new exchanges are expected to open before the end of 2013, including at least two with venture capital funding. In addition to being aided by strong business advisory which may help avoid these issues, a larger number of reliable exchanges will facilitate greater trading volume distribution and inter-exchange liquidity, ever-reducing the effect of micro events on the overall market.

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