Good explanation above.
To answer the question OP had in mind when opening the thread: yes, the price of BTC on a newly opened exchange might differ considerably from established exchanges as a trader puts in the first BID or ASK. Someone might be offering their BTC for $1M at this exchange when it opens. Any trader on the exchange is then free to accept the offer or not.
Topic: Price mechanism of bitcoin exchanges? (Read 1109 times)
Like already said above "the exchange" itself does not sell or buy bitcoins, so it cannot price them. Instead, someone with coins will (hopefully) put up an sell order with a limit price. For example sell 1 BTC for 850 USD. This will then show up in the order book on the "ask" side (asking for 850 USD for a coin).
Now if someone wants to buy coins he can put up a buy order at some price. If this price is < 850 USD, lets say 800 USD, then no trade will happen but the order will show up on the "bid" side of the order book.
On the other hand, if he puts up a buy order with a price >= 850 USD then the order will be matched with the order on the ask side and the coin will be traded to the buyer or 850 USD and the last price for bitcoins on the exchange is hence 850 USD.
As you can see the price is entirely determined by users buying and selling, not by the exchange itself.
If you want to see what this looks like, just look at an alt-coin market with very little volume (no idea what coin this is, I just picked it randomly: https://www.cryptsy.com/markets/view/48).
Now if someone wants to buy coins he can put up a buy order at some price. If this price is < 850 USD, lets say 800 USD, then no trade will happen but the order will show up on the "bid" side of the order book.
On the other hand, if he puts up a buy order with a price >= 850 USD then the order will be matched with the order on the ask side and the coin will be traded to the buyer or 850 USD and the last price for bitcoins on the exchange is hence 850 USD.
As you can see the price is entirely determined by users buying and selling, not by the exchange itself.
If you want to see what this looks like, just look at an alt-coin market with very little volume (no idea what coin this is, I just picked it randomly: https://www.cryptsy.com/markets/view/48).
How would an exchange that just started and is without significant volume price their Bitcoins then?
They have two functions as I see it, the first is to be a place where offers can be made for sell and buy, and automatically match them. The other is to guarantee that the money traded, the bitcoins and the fiat, actually are paid to the respective traders, i.e they function as escrow agents.
They don't peg it to anything, an exchange is just a medium for people to buy or sell something. The price is whatever someone is willing to buy or sell it for. The exchange itself doesn't set any price, the buyers and sellers do.
What exactly do Bitcoin exchanges use for pricing?
Do they simply just peg their prices to a larger exchange such as Bitstamp or implement their own auction market system??
What about for something like LTC/USD or LTC/BTC?
Do they simply just peg their prices to a larger exchange such as Bitstamp or implement their own auction market system??
What about for something like LTC/USD or LTC/BTC?
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