Earlier today the price of Bitcoins traded on Mt. Gox, one of the world’s largest exchanges for the digital currency, under the acronym BTC, reached under $100.00 despite trading nearly five times that value at other exchanges around the globe.
For example, on other exchanges, not facing the same withdrawal or security challenges such as the ones that Mt. Gox recently announced, saw BTC trade against the USD in the range of about $550 today.
This tremendous valuation discrepancy between Mt. Gox and other BTC exchanges, looks to be associated with the risk sentiment attributed to Mt. Gox after the exchange announced a series of challenges that it is facing, in relation to causing withdrawal problems and now security concerns.
Earlier this week, DCMagnates posted that a complaint had been filed seeking class action status against the Japanese-based bitcoin exchange, prompting questions about its ability to stay solvent, as clients now acting as plaintiffs in the case, seek damages related to their recent experience at Mt. Gox amid the developments, and as its future remains unclear. The exchange just yesterday provided an update to the previous update about withdrawals being put on hold, including citing security concerns that had been identified.
Why Are the Prices Lower at Mt.Gox but Not Elsewhere?
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Just as a lower rate bonds approaching junk status increase in their risk-premium with a higher percentage paid for those who purchase the riskier debt, which could default at any moment, unlike their higher rate AAA counterparts that are thought to be less at risk for a default and thus pay a lower return, in return for safety afforded. So too does the discounted rate for purchasing BTC appear to have surfaced, as the future of Mt. Gox remains increasingly uncertain.
Forex Magnates’ reporters recently spoke with a CEO of another exchange in an exclusive interview, as the situation started to unfold earlier in February. It appears that if the company can recover, it will face the challenge of regaining its position from a reputation perspective, with regards to risk and stability, as well as providing an explanation as to the nature of the challenges and how they were resolved, if indeed these can be achieved. Otherwise, the future for the price of BTC and the ability for clients to withdraw their funds may remain bleak on the exchange.
Forex Magnates published an article about the parallels of Arbitrage between Bitcoin and Foreign Exchange several months ago, and while the effeciencies of the developing market were expected to increase, apparently the example of what is happening at Mt. Gox could be viewed as a challenge that any firm could have experienced in a newly developed market. Such growing pains have caused some FX brokers to have their BTC rate providers switched, as the risk for covering BTC priced CFDs skyrocketed as the price divergence was building.
While the huge difference in price may appear as an extreme arbitrage opportunity, the escalated risks could mean that in the case of default, a %100 loss could ensue, whereas a recovery of the company could see an equally large or even more lucrative gain, if clients can recover their holdings and value them at rates for BTC reflective of the prevailing market average (across other major venues).
The price of BTC on Mt. Gox rebounded to around $143 around time of publication by Forex Magnates, yet still considerably off from the mid-point average from other major venues pricing the primordial cyrptocurrency.