What Determines The Bitcoin Price?
Many are closely watching the price of Bitcoin, but few know how it is determined. Bitcoin is very different from traditional assets, such as stocks and commodities, so the calculation of its quotes is associated with some features. We will tell about them in more detail.
What does Bitcoin price really mean?
Speaking about the value on a particular exchange, usually, imply the price of the last transaction made on this exchange. For example, the fact that Bitcoin at Bitstamp costs $ 10,000 means that the last transaction made on this exchange was held at this price. When a new deal takes place, the price will change accordingly.
The process of determining the price is that buyers and sellers are found on a cryptocurrency exchange (or another platform) and, by experience, find the value that suits both parties. Buyers want to buy bitcoins as cheap as possible, sellers tend to sell them as expensive as possible. To make a deal, both parties must come to a compromise. As mentioned earlier, the current value of Bitcoin on any exchange is the latest price that sellers and buyers agreed to. Let’s take a closer look at how the parties come to a compromise on the cryptocurrency exchange.
In order to answer this question, you need to understand what bitcoin is and understand the bitcoin mining process. Let’s start with the first question: What is bitcoin? Bitcoin is the value of any unique information. In fact, you can call this value even bitcoin, even blablabla, the meaning does not change. What is unique information? This is information on the network that is not yet freely available and therefore has some value. What is mining? Mining is the process of extracting blocks of unique information, the cost of which is expressed in bitcoins, programmatically. There is a written content about the mining of various articles and reviews, both for “dummies” and for people who are technically savvy, therefore, we will not dwell on this article. So what does the cost of bitcoins (bitcoin)? To be more precise, the question from the mouth of people with an economic education or associated with the exchanges (currency, stock – no difference), what provided Bitcoin? The answer to this question first plunges into a stupor. Nothing. That is, it is not provided with gold, as it was almost until the end of the last century with ordinary national currencies, it does not depend on the GDP of a particular country, it is not regulated by any particular state within its own monetary policy, Bitcoin cannot be printed on paper and declared the cost of this paper.
Makers and Takers
Changing Bitcoin quotes is usually attributed to the presence of a larger number of buyers or sellers on the market. However, this is completely wrong. In each transaction, there are two sides, so the number of buyers and sellers, taking into account volumes, is always the same. In fact, high activity of one of the parties, ready to pay the spread, leads to a change in quotations. Spread is the difference between the highest bidder’s price and the lowest seller’s price. Suppose an investor is willing to pay $ 9,350 for bitcoin, and the seller wants to get at least $ 9,400 for it. In this case, the spread is $ 50 (9400−9350).
How do takers affect prices
Suppose that buyers are convinced that in a few days the cost of Bitcoin will grow to $ 10,000. In this case, they act as takers and are willing to pay the spread, buying up the entire volume of cryptocurrency offered at $ 9,400. If Bitcoin goes up to $ 10,000, they will get a $ 600 profit. When buyers swallow up all the coins offered for $ 9400, they will go to the level of $ 9450, then to $ 9500, and so on. If buyers show excessive activity, sellers will soon understand this and begin to raise the bid price. The process will continue until the pressure of customers is exhausted and then change direction. Over time, such impulses lead to a rise or fall in quotes.