Topic: How is the price determined for a decentralized currency like bitcoin? - page 2. (Read 884 times)

All great responses here. But, my question is far more basic. It's not the reason why price fluctuates but how, that I seek an answer for? What is going on under the hood that can show me a price change literally every few seconds for an exchange between any two currencies (crypto/ fiat).

The reason I raise this question is because it's far more difficult to dissect the existing financial system (excluding the recent blockchain market). However, it should be easier to answer such questions for a system that has been written from scratch by only one creator (or maybe a group under the same pseudonym).

So, while all you have given reasons enough to justify the change in price, my question still remains unanswered unfortunately.

In simple language what's yielding price P1 at any time T1 and a P2 at T2? There has to be some place somewhere on this planet that impacts those prices and where it is sourced from? How'll you show the cause and effect to a five year old? In this world where all is mathematical (hashing, ECC etc) I expect an answer far more mathematical which is written somewhere that takes certain input parameters and throws an output consistently which is then sourced by different exchanges that people rely on.

Or is it the leading exchange calculating at their end (in their code) based on the trading volume and that's why not open source? Because, my question presumes that all's open source and there should be clear pointers for these prices P1, P2.. to be derived. They are certainly not popping up magically based on the Economics. Someone has to calculate them somewhere (even when applying all the principles that you have stated)?

the volatility is different from all this though. and i don't see anyone covering this part of your question.

the high volatility is mainly because of the size of the orderbooks on these exchanges. specially when you are talking about cryptocurrencies in general this becomes more obvious.
for example if you go on bittrex or poloniex which have altcoins listed, you can see a lot of altcoins which don't even have a high enough daily volume. many of them can go up 100% in price just with spending 10BTC or less. and that means a much higher volatility.

the same is true for bitcoin but on a bigger scale. the orderbooks are very big at first look but usually what happens is that the volume that goes through each fluctuation period is bigger than these order sizes so it leads to a bigger swings.

As Herbert touched on, Bitcoin's value, like anything else for that matter is dependant on DEMAND.

See, the more demand there is for any given thing, the higher it's value.

When there is little Gold available on the market, it's prices rises.

When one company makes the majority of insulin, the price rises (EpiPen).

This is also called a "monopoly" in some instances.

The bottom line is, as more and more online and real-life stores accept Bitcoin, the price will only continue rising. However, if people suddenly stop being interested in Bitcoin, and stop using it - then the price will fall.

There is something going on right now that is related to this topic and cryptocurrency. Ethereum mining. Because the price of ethereum is so high at the moment, people are interested in mining it. Unlike Bitcoin, ethereum doesn't need much hashing power to make a good profit, which means that individuals can do it without investing an insane amount of money. The way they mine is through gpu's, specifically the newer generation amd cards. They are extremely powerful and power efficient. However, the supply of these cards are quite low but the demand is extremely high. Because of this, stores that supply these cards are pushing up their prices by 20 or 30 percent because they know people want the product. It is simple supply and demand. That is pretty much the same with Bitcoin. There is a limited supply of Bitcoin but the demand is rapidly rising, people want to make sure that they get Bitcoin so they are willing to pay a premium price for it,. This train keeps going on and the price of Bitcoin ends up going up.

The more people buy Bitcoin, the higher the price. Since Bitcoin has a limited supply, if the demand increases, we would have to 'fight' (with our cash ) for our share of BTC.


Exchange sites are like individual markets. There might be people selling at a lower price at Market A, and people buying at a higher price at Market B. But a trader who visits these two markets can instead buy from Market A, and sell high at Market B to earn profits. A simple analogy.

The users determine the price of Bitcoin, Bitcoin is governed by all of us. ^_^

well price of bitcoin is not that different from price of anything else. it is being determined based on supply and demand.
if someone has already explained it to you i really can't put it in any other words to make it better.
but maybe these links can help more: http://www.investopedia.com/university/economics/economics3.asp
https://en.wikipedia.org/wiki/Supply_and_demand

usually for supply and demand i see people use the example of winter cloths. in summer time nobody buys winter clothing so the demand goes down and you may find them under their real price. and in winter everyone wants to buy them so the demand goes up and as a result the prices can go higher too.

there is a button at the bottom left side of the page called "move topic"

I guess, I should move this to Economics section. How can I move this topic there without deleting the OP? I even tried deleting this post to create a new post in Economics section but this forum does not let me delete my own post. So, am stuck. Any suggestion?

How is the price determined for a decentralized currency like bitcoin?

So far, I have got mixed responses from elsewhere including theoretical explanations of supply/ demand, trading bots and on similar lines. But, no answer in simple enough language and with authority that explains the price (thus the volatility) of the cryptocurrencies.

Is this somewhere in the code that takes some input parameters to deterministically reach a price, maybe based on the hashing power, difficulty level etc? Or is it more complex? Can someone please explain the inner workings? My curiosity is only to understand the correlation between cryptocurrencies and the Economics in the absence of a centralized governing/ intervening body.

Furthermore, how do different exchanges reach on the consensus for a price? Is it their own algos determining the price on the fly or is it more like a moderator picking on price with a predetermined fluctuation? Or is it more like how remitters reach to a daily price which is close enough to each other (to allure genuine customers, but not as much for an arbitrage)?