How do we handle geographical arbitrage? Demonetisation and bitcoin price premiums in India. Arbitrage is the process of diminishing the difference in price in open markets. If differences in price emerge, they can be exploited for profit until the difference goes to zero. The problem is not bitcoin, the problem is currency controls. Bitcoin has no location as a global network, it was "in the US" to start with or "in India" to end with.
What arbitrage activity tells you is not that bitcoin is worth $1200 here, but that rupees are discounted 20% against hard assets, including other national currencies.The market is sending you a signal. A currency that cannot move across borders is worth less.
Transcript
As you discussed earlier during your live talk, on November 8th the demonetization happened. Overnight, our currency was devalued to 80% and then 60%. [Some of] that money fled into bitcoin. Some part of [the supply], not very much.
Afterwards, we went into December and now we are living in an economy where the geographical arbitrage... If the bitcoin price is $987 dollars in the United States, here it is more than $1,100. Near March 11th, the SEC made a decision on the ETF or something in the United States. At that point, the value of bitcoin goes up to 98,000 rupees in India, or say $1,200 U.S.
dollars. My question is, how can we go through this geographical arbitrage? [ANDREAS] Okay, very good. Arbitrage is the process of diminishing the difference in price of a commodity...
in open markets, when it is being traded at different prices. Arbitrage is something done by individuals who use the opportunity of the difference in price... to trade that difference until it diminishes to zero. Fully functional open markets have very small spreads between geographies.
If spreads or price differences emerge, they can be exploited for profit, which means they should... quickly close again, right? This is the normal operation of markets. What happens when that fails?
Why does it fail? The problem here is not bitcoin. The problem is currency controls. If bitcoin is worth $1,200 dollars here, but $900 in the United States, the obvious answer is...
I [should buy bitcoin in the United States, sell in India. In the process, I don't transfer bitcoin from the U.S. to India. Bitcoin has no location.
It wasn't in the U.S. to start with, and it didn't end up in India. Bitcoin started and ended on the blockchain. It changed owners, and those owners may happen to be in India or the U.S., but it doesn't really matter.
I am not transferring money across borders. I buy bitcoin "in the U.S.," and sell it "in India." The difference is profit. Now what? What did I sell it for?
Let's say I sold it for rupees. I would wire transfer those rupees back to the U.S., and I repeat the cycle until there is no difference in price. I may be able to do this only once. By the second time, my bank could have flagged my account.
The third time I go to wire transfer, my bank [blocks it]. Maybe they also freeze my account. Maybe I get a visit from some friendly gentlemen with mustaches, uniforms, and big sticks. [Laughter] They tell me, "You can't do that." Where, in that series of events, is bitcoin the problem?
The Bitcoin part was easy; the rest was telling you that bitcoin is not [actually] worth $1,200. Bitcoin is not worth $1,200. Bitcoin is worth $943 everywhere, but rupees are worth 1/100,000 of bitcoin. The value of bitcoin didn't change.
It takes more rupees to buy bitcoin because rupees are worth less now. Why? Because you can't move rupees across borders. The rupee is discounted, depreciated, against bitcoin as the harder asset.
Bitcoin can move "across borders." Rupees are also discounted against the U.S. dollar and the euro, etc. The problem isn't that bitcoin is 20% more expensive; the problem is that the rupee is worth 20% less... in bitcoin than the dollar is.
It is difficult to move rupees, to move them out of the country. The market is sending you a signal, telling you a truth, by conducting price discovery. It tells you that rupees in a bank account are worth less than money that can move across borders. It is telling you something about rupees, not bitcoin.
Bitcoin's value did not change. If you have a problem with that, petition your government for the redress of grievances. Address the problem which causes rupees to be discounted 20% against bitcoin. One of the characteristics of money is that it must be portable.
Your rupees are not as portable. As a result, people will only accept them at a discount of 20% for the real, hard, portable currency: bitcoin.