The Law of One Price: Why Do Crypto Prices Differ Between Exchanges?

Crypto prices differ between exchanges because the law of one price, which says identical assets should sell for the same price everywhere, only holds when traders can move money freely and cheaply between markets. Each exchange has its own buyers and sellers, so its price reflects local supply and demand at that moment. Arbitrage usually keeps these price gaps small, but fees, delays and capital controls can allow them to widen.

What Is the Law of One Price?

The law of one price states that identical goods should sell for the same price in different markets once prices are converted into a common currency. If a good is cheaper in one place, traders can buy it there and sell it where it is dearer, and that trading pushes the two prices together.

The idea rests on assumptions similar to those of perfect competition: identical products, many buyers and sellers, and full information about prices. A bitcoin is the same asset wherever it is bought, so crypto looks like an ideal test of the theory.

How Do Crypto Exchanges Set Prices?

Each exchange runs its own order book, a list of the prices at which users are willing to buy and sell. The price shown is simply the level at which the latest trades took place on that platform. There is no single official price for a cryptocurrency, only many local prices.

This is why crypto prices displayed on a US exchange’s price page, for example, are drawn from that exchange’s own order books and quoted in US dollars. Another exchange in another country, with different traders and a different currency, can show a slightly different figure for the same coin at the same moment.

How Does Arbitrage Keep Crypto Prices in Line?

Arbitrage is the process of buying an asset where it is cheap and selling it where it is dear. If bitcoin trades at a lower price on one exchange than another, traders can buy on the first and sell on the second. Their buying raises the low price, and their selling lowers the high one until the gap closes.

Research suggests this works reasonably well within a single country. In a study published in the Journal of Financial Economics in 2020, Igor Makarov and Antoinette Schoar found that price gaps between exchanges were much larger across countries than within them and smaller still between different cryptocurrencies on the same exchange.

Why Do Crypto Price Gaps Persist?

Arbitrage is not free. Traders incur withdrawal fees and trading-related costs, and an exchange's process for transferring funds takes time, increasing price discrepancies between two different exchanges. Some regulated exchanges also require users to verify their identities before trading, preventing them from taking advantage of arbitrage opportunities quickly.

Between countries, the obstacles are larger. Capital controls, which restrict the movement of money across borders, act as barriers to entry for arbitrage traders.

Makarov and Schoar reported that between December 2017 and February 2018 the average daily price ratio between Korea and the US reached 40% on several days. In their view, the gaps were too large to be explained by transaction costs alone and reflected limits on moving capital between markets.

Why Do Crypto Prices Look Different in the UK?

A British consumer purchasing cryptocurrencies priced in USD will see the cryptocurrency’s US dollar price and the exchange rate between British pounds and US dollars. Movements in either will affect its price in sterling (GBP).

Applied across whole economies, the law of one price is the foundation of purchasing power parity (PPP), the theory that exchange rates should adjust until the same basket of goods costs the same in each country. The PPP and the Law of One Price do not hold in practice, since trade and capital movements have something called transportation costs associated with them. Similarly, cryptocurrency has followed the same trend on a smaller scale.

What Do Crypto Price Gaps Mean for Buyers?

Many buyers find that there are not many differences between the large, liquid exchanges in the country they live in. The total cost of a purchase is often much more influenced by fees, spreads and currency conversion than by the lowest price advertised on a particular exchange. UK readers should also note that US platforms serve American customers, so their prices are a useful reference point rather than a price a UK buyer can necessarily trade at.

Supporters of crypto argue that the narrowing of price gaps over time shows markets becoming more efficient as more traders take part. According to Makarov and Schoar, during price increases, gaps often expand quicker than the time it takes arbitrage to react due to demand responding much quicker than arbitrage. Therefore, rather than being viewed as an enforcement of a fixed price (as in the Law of One Price), the Law of One Price should be referenced as a driving force toward bringing prices back together.