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Author Topic: What determines the fluctuating value of a bitcoin?  (Read 1670 times)
Maniac479 (OP)
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September 01, 2012, 03:24:41 AM
 #1

Maybe someone has answered this somewhere else, but I haven't seen it.

The value of a bitcoin fluctuates minute by minute, and isn't the same on different platforms.

Who or what determines the daily value of a bitcoin? Why is it different on different platforms?

hashman
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September 01, 2012, 03:31:28 AM
 #2

Warning: Socratic method answer attempt

How much would you pay for a glass of water in different circumstances?
What is the value of a glass of water? 
What are some reasons people need or want bitcoins? 
Where are some different places to buy and sell bitcoins?
What determines the fluctuating value of a bitcoin?   






Maniac479 (OP)
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September 01, 2012, 03:41:51 AM
 #3

The value of a glass of water is easy to determine. I just look at my water bill.

Anyone with a water bill can determine the value of a glass of water by this method.

Not so simple with bitcoin.
Severian
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September 01, 2012, 03:44:10 AM
 #4

The value of the dollar not only fluctuates, it's lost most of its buying power in the past 100 years. People still find a use for it.
Maniac479 (OP)
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September 01, 2012, 03:52:29 AM
 #5

People always say the value of a dollar is losing value. Not true- it depends on what you want to buy.

One hundred years ago, you could have $1,000,000 and you couldn't buy a cell phone or a computer.
You couldn't take an airplane to Europe.

If something can't be simply explained, it really isn't understood.


Maniac479 (OP)
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September 01, 2012, 03:57:54 AM
 #6

Theoretically, the different values of bitcoin (in USD) on different platforms/exchanges is an exploit waiting to happen. Someone with enough money could simply buy them on one exchange and sell them on another and exploit the difference. Apparently this has already happened; someone has built a bot that can do this. I read about it somewhere but don't remember where.
Severian
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September 01, 2012, 03:58:24 AM
 #7

100 years ago, a dollar was 1/20th of an ounce of gold. It's now around 1/1700th of an ounce of gold.

1 bitcoin is about 1/170th of an ounce of gold,starting from near nothing not too long ago. Bitcoin has outperformed both the dollar and gold thus far in its brief existence.
Severian
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September 01, 2012, 04:00:09 AM
 #8

Theoretically, the different values of bitcoin (in USD) on different platforms/exchanges is an exploit waiting to happen.

Arbitrage is an expected part of exchange trading:

http://nyse-group.de/bitcoin-arbitrage
kjj
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September 01, 2012, 04:14:49 AM
 #9

supply and demand

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Stephen Gornick
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September 01, 2012, 06:42:21 AM
Last edit: September 01, 2012, 06:57:17 AM by Stephen Gornick
 #10

The value of a bitcoin fluctuates minute by minute
[...]
Who or what determines the daily value of a bitcoin?


When you buy from a retailer, they dictate the price that you pay.  You can choose to buy at that price or you can leave without buying.  There is generally no haggling on price though.

Market exchanges like Mt. Gox don't set the price.  The price quoted comes entirely from a form of haggling by their customers.

Here's a video that explains how markets work:

 - http://www.dailymotion.com/video/x871h9_real-world-economics-simple-supply_school (15 minutes - it includes a little propaganda at the end, sorry, but it was about the first decent video I could find that describes market price.)

So at Mt. Gox, customers put in buy orders and sell orders.  Each buy order indicates a quantity and price that the buyer is willing to buy at.  Each sell order indicates a quantity and price that the seller is willing to sell at.  

The point where the buying and selling meets without a sale happening is known as the "cross price"  (or sometimes called the "spot market price").  In economics this is called the "market equilibrium":



 - http://en.wikipedia.org/wiki/Economic_equilibrium

A market exchange like Mt. Gox doesn't care what the market equilibirium price is because they get a commission each time coins are bought or sold.  

Other exchanges simply buy coins elsewhere and market them directly to customers at a given price.  Their price generally includes a markup on the price that they pay.  So the price will fluctuate because the price that they pay their supplier (e.g., when they buy from Mt. Gox) will fluctuate.


Now the reason the price at Mt. Gox's BTC/USD is always changing minute to minute is because there are always things going on causing people to want to buy or sell bitcoins.  Thus the market equilibrium moves based on market conditions.  This is not unique to Mt. Gox, nor to bitcoin exchanges.  This is how nearly all financial markets operate.


The value of a bitcoin fluctuates minute by minute, and isn't the same on different platforms.

In order to sell your coins at Mt. Gox, you need to first deposit them with Mt. Gox.   So your funds can only be at one market exchange at a time.    So even though you might get a better price selling them at another exchange, for you to do that you would need to transfer them -- something that has a cost (in your time, at a minimum).  So markets aren't perfectly efficient as a result -- there will be a buyers who find they need to pay more at one market or sellers finding they need to sell for less when using a different market.  This too is not unique to Bitcoin or even to financial markets.  The price you see for a gallon of milk is different from one store to the next.  That too is an example of a market inefficiency.

Now there are traders who can make a profit by lessening these inefficiencies.  They do this by keeping funds on several exchanges at once allowing them to buy where the selling prices are cheap and sell where the buying prices are expensive.  The trading they are doing is called arbitrage.  The price differences between exchanges provide arbitrage opportunities.  There is a lot of that occurring, and there are sites that help provide information on these price differences:

 - http://nyse-group.de/bitcoin-arbitrage
 - http://bitcoin-analytics.com/#arbitrage

if you are only buying small amounts, not much of this matters.  But those doing large amounts of trading and wanting the best prices don't need to worry about going around to each exchange and trading at each -- simply trade at one exchange and let the arbitrageurs add liquidity.  These arbitrageurs do profit from it but probably less than it would cost trying to spread your trading across a number of exchanges yourself.

Theoretically, the different values of bitcoin (in USD) on different platforms/exchanges is an exploit waiting to happen.

Except that performing that "exploit" is helping the markets by keeping prices in synch -- so we can know what price a bitcoin will fetch "at market",

So that's how various markets work.

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hashman
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September 01, 2012, 06:59:28 AM
 #11

The value of a glass of water is easy to determine. I just look at my water bill.

Anyone with a water bill can determine the value of a glass of water by this method.

Not so simple with bitcoin.

It is that simple, if indeed you still wish to look no further.

The value of a bitcoin is easy to determine.  I just look at my bitcoin bill [from e.g. Mt.Gox].
Anyone with a bitcoin bill can determine the value of a bitcoin by this method.   

Actually bitcoin prices have a much narrower range globally than prices for water.
Care to tell us why? 



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