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I know there are price difference across all exchanges but they are relatively similar. If each exchange operated independently I would think the price of coins would be radically different since the liquidity and exchange pattern would have nothing to do with each other. Are exchanges tied to a central index? How do they keep a somewhat "consistent" price?
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If I could buy a bitcoin on Exchange A for $2,000, turn around and immediately sell it on Exchange B for $2,500, and make an immediate profit of $500, I would do that all day long, and get rich!
But if even a small price discrepancy exists between two exchanges, many people will find it, and start buying on one/selling on the other.
All that one-sided buying in one market and selling in the other market moves the price back to equilibrium.
There's also a human/psychological factor to consider, if BTC on ExchangeA is $2500, and on my exchange it's $2400, I'd be tempted to buy as I expect the price is going up, adding to it's rise. Likewise, if the price is lower elsewhere, I may be tempted to sell and re-buy lower driving the price down. – Daniel Morritt – 2017-07-04T16:26:38.403
so theres no central index, just market forces? – t q – 2017-07-04T17:08:00.343
@tq Correct! Nobody is around to set any "monetary policy", or decide to mint new coins, or make loans that don't actually exist. It's purely down to market forces, if people give bitcoin more value or the demand outstrips supply, it goes up, if they think it's overpriced or there's a surplus, it goes down. – Daniel Morritt – 2017-07-05T11:19:46.333
@DanielMorritt: It is interesting to note that the price is set purely on each market's "say-so". If a market claims that coins go for $3,500, there is no way to verify that. In theory, it would be really interesting to see a double-sided blockchain where cash and BTC are both recorded, and the actual price of each BTC transaction is publicly recorded. – abelenky – 2017-07-24T22:06:54.937
1https://en.wikipedia.org/wiki/Law_of_one_price – Nate Eldredge – 2017-07-04T14:31:36.073
For reasons why this might not happen, see https://bitcoin.stackexchange.com/questions/9626/why-do-the-price-of-bitcoins-vary-wildly-between-exchanges, https://bitcoin.stackexchange.com/questions/9015/is-anyone-taking-advantage-of-different-prices-across-exchanges
– Nate Eldredge – 2017-07-04T14:42:47.827thank you for the posts, I was wondering how exchanges overcome arbitrage. – t q – 2017-07-04T16:57:28.700