Price spreads: A real life explanation as to why the spread between the USD market and the AUD market is wider than your mothers’ legs…
August 27, 2019
Oof, that was a bit rude wasn’t it? But now that I have your attention, and you’ve clicked the link, you may as well stick around for a while, as we delve into market spreads (without the help of your mum)
A commonly asked question I get (or complaint, depending on what sort of tone you read the message in) is “Why is the price of Bitcoin on your site $X+% when the price of Bitcoin is actually $X? Are you ripping me off?”
Ahh yes, because on a daily basis I stake my 5 year reputation in the bitcoin industry, hedging it on the bet that you don’t notice that I’m charging you ridiculously inflated fees, so I can drive my shiny red Ferrari to my high rise penthouse apartment looking over Sydney harbour.
No buddy, I drive a 2004 Hyundai Tiburon, whilst living in area popularly associated with Centrelink and methadone recipients. If I were ripping you off with the use of dirty tactics and hidden fees, I’d rename my business to “Bank Babe” and ask the government for a bail out every 20 minutes to help me afford the lavish lifestyle I wish I had.
But while I could sit here and discuss the hyped-up expectations of how a bitcoin trader should live vs the actual reality of that until the junkies next door stumble home from the methadone clinic, It wouldn’t stay true to what this post is really about – market spreads.
Now I’m sure there are many reasons and explanations as to why the price of Bitcoin here in OZ is at some points, significantly higher, than at a major exchange, like Bitstamp or Bitfinex, or Kraken. We often hear the phrase “supply and demand” thrown around, or buzz words like “liquidity” and the consideration of the time of the day – Is china awake? Is USA sleeping? But unless you intend on trading in hundreds and thousands of dollars’ worth of Bitcoin on a daily basis (Insert shameless self-promotion about my OTC services here), the chances are, these reasons wont be overly relevant to you.
In the last 12 months, the average BB customer purchased $441.88 worth of Bitcoin in a single transaction – it’s a far cry from a 6-digit whale order, but still, a modest amount for the average crypto dabbler. Keeping that figure in mind, have you ever wondered, how much that would “actually” cost you to send to a “real” Crypto exchange?
To ensure some consistency across the comparison board, we’ll introduce Timmy.
Timmy recently opened an account with popular overseas exchange Bitstamp, where the main trading pair is BTC/USD, and is a market leader when it comes to determining the “rate” of Bitcoin.
For this experiment, we’re going to send Timmy to open some bank accounts with the big 4 banks – Commonwealth Bank, NAB, Westpac and ANZ. Now while it is a well-known fact the big 4 have crappy exchange rates – compared to more competitive FX services - Bitstamp will only credit funds to Timmy’s account if the funds arrive in his name, something these FX services cannot do.
Timmy puts $441.88 into each of his Big 4 accounts and initiates an International Wire Transfer among each – also known as a SWIFT payment. Here’s where the fees start to pop up…
The initiation fee
In the last few years, I will say the banks have started to become a bit more competitive with their initiation fees – within reason. So long as you are willing to do the leg work yourself and get yourself set up online using your internet banking, you should be charged no more than $10 depending on your bank. But, as soon as you require assistance, whether it be putting the transfer request in over the phone or in branch, or making a change to the transaction (for example, you forgot to put the correct reference) then it begins to become a costly endeavour and each assisted transfer or change can cost up to $30 for EACH task!
For the purposes of this experiment though, we’ll say Timmy is a knowledgeable young man, who knows his way around an internet banking site and gets the process going without any hiccups.
Let’s face it, banks have been rorting us on currency conversion for years. While the differences are almost unnoticeable when you’re looking at a dollar to dollar comparison, people seem to forget that when you multiply your asking price by 10, you also multiply your fee by the same amount.
In Timmy’s case, the market rate at this point in time is $0.671685USD – meaning for every $1 Timmy converts from AUD to USD, he should receive about 67 US cents - so for his $441.88 he should get $296.80USD – but for sad little Timmy, this wont be the case, because banks.
Intermediary Bank Fees
This is a tricky one. Depending on how your bank sends money overseas, it may employ the use of an intermediary bank. Think of it a stopover flight for your money – You’re flying from Sydney to New York. The plane wouldn’t make it the whole way as it needs to refuel, so you might change flights at LAX.
The problem is though, these intermediary banks also like to take a piece of the pie – if they’re going to contribute some of the effort in processing your payment they might as well be compensated for their time, right? For the most part, its damn near impossible to find out if your bank will use an intermediary, and how much of a slice they are going to take. More often than not, you don’t find out until after your funds have been credited to their destination account!
Because the outcome is varied, will give Timmy the benefit of the doubt, and say no intermediary bank was used in this transaction (whew!) – But do keep this in mind when we analyze the results!
Every exchange will charge fees. This is something that really needs to be understood. That market price you’re ogling on Cryptowatch and comparing to the Aussie market price? It doesn’t include fees! Fee structures will vary from site to site - Some high, some low, some even depending on if you’re a maker or a taker, but most will reward you with a fee discount if you trade large quantities on their platform; Think $10,000USD+ before you start seeing any form of reduction. This is a far cry from Timmy’s $441.88.
Back to Timmy, and after a 1-5 business day wait for his funds to clear into his Bitstamp account, Bitstamp are about to take their cut too – a $7.50USD flat deposit fee, and then a 0.5% Trading fee when he finally places his order on Bitstamp’s books.
So how much did you really pay in Fees?
With a bit of reverse engineering (aka, high school mathematics) we can work out how much Timmy really paid for his $441.88 worth of Bitcoin:
Across the big 4, the average fee paid to get money from Timmy’s bank account, into Bitstamp and converted to Bitcoin, was 5.1%, and that was based on near perfect conditions – No intermediary bank used, no bank assisted transfer, and no amendments made to the transfer.
Keep in mind though, those figures aren’t exactly “solid”. When dealing with flat fees (such as the deposit fee at Bitstamp, or the initiation fee with your bank), this would cause the percentage figure to go up or down, depending on the value of your payment. If Timmy had sent $100 from his CBA account, he would have lost 18.22% to fees. Alternatively, if Timmy had sent $1000, it would have only cost him 2.27% in fees.
But sadly, we live in a hypothetical world.
I hate to break it to you, but Timmy isn’t real, and neither is the ability to send Bitcoin from your bank account to an overseas exchange!
Based on consumer reports – and my own experiences – sending funds from your big 4 account to an overseas exchange may have a varying result; from the transfer being stopped and returned to you with a stern warning of “don’t try that again”, all the way to your accounts being closed and a life time ban issued. Your bank claims they are doing you a favour due to the “high risk of fraud and scams”, but that is another blog post for another time!
The cost of convenience
We live in a world where we can essentially get what we want yesterday – Amateur taxi drivers pick up food from our favourite restaurants, all the way to couriers who deliver you a new pair of shoes the same day you order them. While these sorts of things can be relatively helpful (in making us lazy), they do come at a cost. Bitcoin is no different.
Cost of sending money aside, who really wants to wait up to FIVE BUSINESS DAYS for their Bitcoin? Judging by the amount of complaints I get from customers having to wait up to two business days for a domestic (and fee free) bank transfer, I’m going to say not many of you do, which is another reason why you may notice more of a spread. Services that offer “instant bitcoin” come at a cost. POLi, Flexepin, PayPal etc. are all service providers who charge Australian exchanges fees for the luxury of giving the consumer what they want, when they want.
While processing fees are nothing to be angry about (these companies need to make money too!), they are going to tack onto the cost of your purchase somewhere – nobody goes into business on the premise that theyre going to give away something for nothing. So, if you’re looking to reduce your spread, try opting for more traditional methods instead – like Bank Transfer, PayID, Cash Deposit, or Cash in person.
So, do you feel the spread when purchasing? How do you make it worth your while? Let me know in the comments section!