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An Economics Education by Bitcoin – Part IV

Just as one can purchase traditional commodities on a number of different exchanges in a number of various countries, and at times there might be price differences between these exchanges, so too, there are several Bitcoin exchanges, and there may be price differences between them. Arbitrage players take advantage of price differences to be able to buy commodities in markets where there is surplus, as well as to sell commodities in markets where there’s dearth. Similar opportunities exist in Bitcoin markets. You wouldn’t expect that to be so with a digital commodity, but the location where the rubber really meets the road, you can find external factors. Most naturally, different exchanges in different countries operate in a variety of fiat currencies, so for instance, when we compare the Bitcoin price in US dollars between a Canadian-based exchange and also a Hong Kong based exchange, part of the significant difference is because of the friction of the exchange between those many different local currencies.

Let us think about a concrete example. You are a Canadian who’s been vetted by a Canadian Bitcoin exchange in accordance with Know-Your-Customer (KYC) and Anti-Money-Laundering (AML) procedures, and you have opened an account and deposited Canadian dollars. You wait for a dip in the price of Bitcoin and after that you make the purchase of yours. Weeks or days later, the price has not moved much, but you notice it’s showing some appreciation on a particular Hong Kong-based exchange; there, its price has gone up by ten % since the time you bought it. Transferring Bitcoin from one wallet to another is cheap or even free if you’re in no rush, so it’s a very simple matter to move the Bitcoin of yours to a wallet at that exchange – or it will be if you had a wallet at that exchange. Opening a wallet at that exchange is a hurdle, but a minor one, and an hour later, you sell those Bitcoins. Now what? You are left with a balance of Hong Kong Dollars in a Hong Kong-based Bitcoin exchange. This is where the hurdles get bigger; you’ll likely be required to go through AML and KYC processes before you are able to go that fiat currency out of the Hong Kong exchange, and even then, how would you do it? Will they mail you a check? Will they wire it to your Canadian bank? What do they charge for fiat withdrawals? What’ll your Canadian bank do with those Hong Kong Dollars? Will they exchange them for you to Canadian Dollars? At what exchange rate? What fees? What are your tax implications? That ten % appreciation on another exchange all of a sudden doesn’t seem like such a windfall.

These troubles as well as costs are the friction that creates some of these imbalances. If Indians are having a buying spree, bidding up the cost of Bitcoin on their local exchanges, it is usually a challenge for individuals selling Bitcoin in many other currencies to cash in on the arbitrage opportunity. Nonetheless, it’s not insurmountable, and you will find rewards for people who could discover how you can do it economically. Travelers who bank in multiple countries and who have need for multiple currencies, for example, may be able to reduce these frictional costs.

We find the same type of opportunities offered in Bitcoin mining. Mining with any hope of generating revenue consumes lots of power – much so that it costs a lot of people even more than it generates. Nevertheless, in case you reside in a situation where power is free (i.e., Venezuela), inexpensive (i.e., sun or perhaps wind), or where thermal output of mining is able to offset the heating costs of yours, it could be easy to mine profitably.

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The common thread in these opportunities is your success requires that you find and fill a niche: serve an underserved need. Mine to speed transactions for others when you have an economic benefit to do it. Exchange to provide liquidity for others who cannot move capital between currencies as easily as you can. It’s by doing these things for others that you are compensated.

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