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Sunday, May 9, 2021

Exchanges Don’t Set Crypto Prices – Your Actions Do

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Ever wondered why the price of Bitcoin and your favorite coins isn’t the same across popular exchanges like Blockchain, Coinbase, Kraken, Binance? It’s because Exchanges don’t set prices – your actions do. Here’s how.

Remember when someone told you your favorite coin dipped to a frigging unbelievable low amount and they bought the dip and are now sudden millionaires but you went back to trace every single wave price on your chart but couldn’t find it and you thought they were either lying or crazy?

Well, I remember. A few months ago, I saw Ethereum had dipped on an exchange I wasn’t using courtesy of a friend. I tried to find the dip by tracing the lowest lows on the charts of my exchange but I couldn’t. Desperate to understand why I missed the dip even though I had price alerts set up to catch dips like that led me to a trader whom I felt was more experienced to explain it to me. Unfortunately, he took to his charts and when he couldn’t find the dip, started explaining a different topic to me.

More recently, someone told me Luno is hiking the prices of the currencies listed on its Nigerian platform because of the current situation with the country’s apex bank; The Central Bank of Nigeria released a circular banning its citizens from trading crypto. More on the ban can be found on Fisayo Fosudo’s youtube channel. Although hiking prices due to the restrictions sounds logical, it’s far-fetched because a while back Luno released an article explaining why Bitcoin price is behaving strangely in Nigeria amongst others. Had he read that he probably would have been better informed and would have refrained from jumping to such a conclusion? If you would like to read that article to avoid making uninformed conclusions you can always click here.

What exactly is a cryptocurrency exchange?

According to Wikipedia, a cryptocurrency exchange is a platform that facilitates the trading of cryptocurrencies or digital currencies for other assets such as conventional fiat money or other digital currencies. In simple terms, this means a place where buyers and sellers of crypto gather to exchange or trade their favorite crypto coin.

Now that it’s clear that people make up an exchange, let’s go back to basic economics and review the subject of supply and demand. Indeed, a rise in the demand for a commodity without an equivalent rise in supply leads to an increase in the price of that commodity and vice versa. With this definition, we can understand that when the number of sells of a particular currency listed on a particular exchange is greater than the number of buys the price of the currency drops, and this phenomenon is independent of exchanges.

For example, if there are more sell positions than buy positions on Binance for Bitcoin and this causes the price of Bitcoin to fall, it falls only for that exchange, it doesn’t directly translate to other exchanges as buys could be more than sells on Kraken for Bitcoin leading to an up in price for Bitcoin. More so, one thing crypto enthusiasts must realize is that although Exchanges are independent, the actions of the users on these platforms often correlate. This is why the percentage difference in prices across exchanges is often minimal as we’ve seen over the years.

The above explanation doesn’t necessarily explain the issue of Exchange Dependent Dips and this is partly because there aren’t guidelines to show why Mr. A finds a dip on exchange A and buys it and Mr. B cannot on exchange B. For definition purposes, a Dip (Decline in Price) defines itself; a situation where a cryptocurrency experiences price reduction. It is visually identified as a “valley” on a price chart. However, research analysis from past occurrences has led us to believe that some of the major reasons that cause exchange-dependent dips are negative press about an exchange, hacks, and upgrade of systems.

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The use of huge centralized custodial exchanges is a terrible weakness in an otherwise decentralized economy and has caused massive hacks in exchanges until the platforms realize that they need to shift to non-custodial exchanges. A shift like this eventually causes a dip in the cryptocurrencies listed across that exchange as its users are caught up in a fear bubble which eventually leads to a majority of them holding sell positions.

A few months ago, January 6 2021 20:00 hours to be exact, following the after-effects of the Ethereum 2.0 launch, Quidax Exchange experienced a major one-of-a-kind Dip while upgrading their systems where the price of 1ETH was less than $1 (400 Naira) in the four-hour chart as shown in the picture below. Although not many people know about this, take a second to imagine you knew, bought the dip, and paid $200 for 100ETH. Given the current value of 1ETH: $2,827.45 at the time of writing this article, as listed by Coinbase, you’d probably be rolling in the sheets with your profits.

4-hour ETH/NGN chart Quidax Low - 200 Naira
4-hour ETH/NGN chart Quidax Low – 200 Naira

Well, it’s okay to take your head out of the clouds now because you’re probably enthusiastic that this might happen again and you’d buy the dip and get that one thing money has been stopping you from buying. I do hate to be the one to break it to you, but although this particular event can reoccur the probability of it happening anytime soon is so small that you’d have a better chance at getting a camel to go through the eye of a needle.

Taking a look at the price of cryptocurrencies across exchanges right now, you would have probably noticed that prices on the Luno Nigeria exchange seem to be behaving strangely well. While this opens up a profitable arbitrage opportunity, it’s sad that you can’t sell coins to Luno and cash out to your bank account with their amazing too-good-to-be-true rate, all thanks to the Central Bank of Nigeria. This makes me sad, but I’m glad you now understand the effect of your actions on exchanges. As we continue trading in the current bull market, I hope you all make the right decisions that take you a step closer to your goals. Do leave a like on the article, comment below, and share it with others.

Anthony Dirisu
Blogger, PapercodePost



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