The Need for Arbitrage

Bitcoin just happens to be some sort of "decentralized" thingy. Or, at least it is supposed to be. But if exchanges are required for most people to obtain Bitcoins, and one exchange is primarily responsible for setting the valuation of XBT, how is that living up to decentralization? More importantly, why is this happening and how can we stop it? The answers can all be found in arbitrage.

ar·bi·trage

1. the simultaneous buying and selling of securities, currency, or commodities in different markets or in derivative forms in order to take advantage of differing prices for the same asset.

It is no secret that XBT prices are very different depending on where you trade. BTCChina converts to $438 while BTCe is at $406. But if these prices could be leveled out between all the exchanges and the market could have one single valuation, we would be far less susceptible to volatility and runs on XBT. For example, one exchange had a massive spur of volume and led to the XBT price rising at all the exchanges. Then a DDoS happened, people panicked, the price went down, people panicked more, and we finally stopped after XBT lost ~80% of its value in minutes. One exchange followed another, because that one exchange was the primary reference point for the value of XBT as a whole. Had that situation taken place in a more efficient market, the price would not have risen so fast, but it also would not have crashed quite so abruptly.

So if it betters our community as a whole, and presents a way for traders to make money, why is it not happening? The main answer is because of problems exchanging fiat, especially quickly enough to make the gains worthwhile. All the exchanges currently require either antiquated methods of money transfer (mailed money orders, wires, etc.), or third party payment processors. Since exchanges are essentially selling money for other money, and the latter is densely polluted with fraud, most payment processors will not accept the risk. Especially since doing so also requires insane Anti-Money Laundering and Know Your customer Laws (AML/KYC).

By now you might be asking yourself why I am wasting my time to spill this common sense all over the place. Because for most, this is far from any sort of new information. However, the answer has been right in front of us for quite some time, most just refuse to see it as the tool that it is. Litecoin, or some other reasonable alt-coin, needs to be added to the exchanges. Something that operates in the same fundamental ways that Bitcoin does, without actually being Bitcoin. While this does not remove the problem of getting fiat into an exchange, it could perfectly serve the purpose of balance between the exchanges and bring efficiency to the market. Anytime one coin trades at different values, the other coin would be available to quickly arbitrage, and there would undoubtedly be lots of bots doing exactly that.

While I do truly feel that an alt-coin would be the perfect counterbalance to market discrepancies, there are plenty of naysayers to challenge me. Some feel that having more than one cryptocurrency diminishes the perception, and thus adoption, of the one to rule them all. Most just refer to alt-coins as scams, etc. In fact, talking to many involved with Bitcoin about alt-coins is eerily similar to talking to traditional investors about Bitcoin. Anyways, even if Litecoin were added to exchanges, and funds did get moved from XBT to LTC, XBT still has the majority of the infrastructure which would allow it to hold position as ruler. Undoubtedly the indirect promotion of LTC would lead to more services and acceptance overall, but is that really such a bad thing when we are in the middle of debacles such as coin validation?

In short, we need arbitrage and an alt-coin such as Litecoin is the already existent perfect tool.