03 Sep '13, 1pm

How Bitcoin Spreads Violate a Fundamental Economic Law

How Bitcoin Spreads Violate a Fundamental Economic Law

If you click over to Mt. Gox, the most famous bitcoin exchange, one unit of the crypto-currency will set you back $145. But at Bitstamp you would pay only $129. (At time of writing; prices can change quickly.) Mt. Gox traders are thus paying a 12% premium for their bitcoins. That spread seems to violate a fundamental economic law. When transaction costs are low, identical items should trade at nearly identical prices. Otherwise, arbitrageurs would step in to buy cheap and sell dear until the price gap narrows. But that isn’t happening. The “law of one price” used to hold. Last fall and winter bitcoin prices at the two big exchanges typically differed by less than 2 percent, a reasonable range given exchange fees and the cost of money transfers: In April, however, the bitcoin market went haywire. After spiking to $266 on Mt. Gox, bitcoin prices cratered, falling as low as $...

Full article: http://www.forbes.com/sites/beltway/2013/09/03/how-bitcoi...

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