There are a number of Bitcoin exchanges, and there may be price differences between them, just as there are a number of traditional commodities that can be purchased on a number of different exchanges in a number of different countries. At times, there may be price differences between these exchanges. Players in arbitrage use price differences to buy and sell commodities in markets where there is a surplus and in markets where there is a shortage. Bitcoin markets offer opportunities similar to these. With a digital commodity, that wouldn’t be expected, but there are external factors where the rubber meets the road. It goes without saying that different exchanges in different nations use different fiat currencies. As a result, when we compare the price of Bitcoin in US dollars on an exchange based in Canada and one based in Hong Kong, for instance, a portion of the difference is caused by the friction of the exchange between those different local currencies.
Let’s look at a real-world example. You have opened an account and deposited Canadian dollars, and you are a Canadian who has been checked out by a Canadian Bitcoin exchange in accordance with Know-Your-Customer (KYC) and Anti-Money Laundering (AML) procedures. Before making your purchase, you wait for the price of Bitcoin to drop. After a few days or weeks, you notice that the price hasn’t changed much, but it is showing some appreciation on a specific Hong Kong-based exchange; There, its price has increased by 10% since you purchased it. If you’re not in a hurry, it’s easy to move your Bitcoin to a wallet at that exchange—or it would be if you had a wallet there—because moving Bitcoin from one wallet to another is cheap or even free. At that exchange, opening a wallet is a minor obstacle; an hour later, you sell those Bitcoins. What next? In a Bitcoin exchange based in Hong Kong, your remaining balance is in Hong Kong Dollars. Here are the more difficult obstacles: Before you can move that fiat currency out of the Hong Kong exchange, you probably need to go through KYC and AML procedures. Even then, how will you do that? Will a check be mailed to you? Will they send it by wire to your bank in Canada? What are their fees for cash withdrawals? How will those Hong Kong dollars be used by your Canadian bank? Will they convert them into Canadian dollars on your behalf? What is the rate of change? What are the costs? What are the effects on your taxes? That sudden 10% appreciation in a foreign currency doesn’t seem like a huge win.
These expenses and inconveniences are the contact that makes a portion of these irregular characteristics. It may be difficult for people selling Bitcoin in other currencies to take advantage of the arbitrage opportunity if Indians are going on a buying spree and raising the price of Bitcoin on their local exchanges. However, it is not impossible to overcome, and those who are able to do so economically will reap rewards. Travelers, for instance, who require multiple currencies and bank in multiple nations may be able to reduce these frictional costs.
In Bitcoin mining, we discover the same opportunities. Mining, if it has any chance of making money, uses a lot of power, so much so that most people pay more for it than it makes. However, it may be possible to mine profitably if you live in a place where power is free (such as Venezuela) or cheap (such as solar or wind), or if the thermal output of mining can offset your heating costs.
The consistent idea in these open doors is that your prosperity expects that you find and fill a specialty: fulfill an unmet need. Mine to expedite transactions for other people when you have an advantage financially. Exchange to provide liquidity to others who are unable to easily transfer capital between currencies. You get paid for doing these things for other people.