Why Are Bitcoins Worth $70?

[Bitcoinm]

I understand that the market reaches this consensus through buyers and sellers placing their bids and asks on the exchanges, but WHY is a Bitcoin worth that price?

If Bitcoins were at $50 right now we would all probably think that was completely reasonable.  If they were trading at $1000 a Bitcoin we would accept that too.  Do buyers just pick arbitrary sell prices in their head, and then sellers pick arbitrary buy prices, and then the market reaches a consensus?  Does anyone actually have a good understand of this or is there no "good answer".  Thanks.

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[the joint]

I understand that the market reaches this consensus through buyers and sellers placing their bids and asks on the exchanges, but WHY is a Bitcoin worth that price?

If Bitcoins were at $50 right now we would all probably think that was completely reasonable.  If they were trading at $1000 a Bitcoin we would accept that too.  Do buyers just pick arbitrary sell prices in their head, and then sellers pick arbitrary buy prices, and then the market reaches a consensus?  Does anyone actually have a good understand of this or is there no "good answer".  Thanks.

You actually answered your own question.  "Consensus through buyers and sellers" is what creates the exchange rate which is determined at the exact moment of a given transaction.  Now, to answer "why" the consensus has declared Bitcoin is worth ~$70 USD you need to look at utility.  Why is Bitcoin more valuable respective to other currencies?  It's because of its fundamentals.  Bitcoin is generally considered to be more useful than other currencies as a means of transferring/storing wealth, and so the general consensus is that its value is higher.  Moreover, I think it's safe to say that Bitcoin being valued at ~$70 USD is currently the result of speculative consensus.  For example, with all this talk about Coinlab taking over operations for Mt. Gox in the USA, people may be speculating that investors will find Bitcoin very useful as well, and so we predict Bitcoin's value will continue to rise as its utility is recognized by additional others.

[shkiser]

As most commodities btc is worth whatever someone will pay for them.

The increase or decrease in btc supply and demand that would influence the btc price depends on how many dollars, or other currency, a buyer is willing to pay for btc versus the amount of currency a seller is willing to accept for his btc.

 The willingness of all these parties to change paper currency for btc and vice versa is what determines the price of btc in relation to each different paper currency respectively.



I myself, believe theyre worth more than an ounce of gold. Eventually I think well see the value settle in at $400-$800/coin.

[porcupine87]

Expectations! Only expectations! The exchange rate will fall down, if bitcoin owner some day realize that this expecation cannot be fullfilled. I think Cypres was the main reason for the recent price raises. You read of "robbing". People just realize that no investment is without risk. But is Bitcoin? No! It isn't! I am a really big fan of Bitcoin but the today exchange rateis too high. You know when Amazon or Walmart had 5 days ago pronounced they will accept Bitcoin the exchange ratewould be even to low. But nothing of that kind happened...

I hope the price will crash, so I can buy

PS: I just realiszed that "course" does not mean "exchange rate" (same word in German). damn it! I'm glad to realize that now. Otherwise my post would have not make much sense^^

[DannyHamilton]

The exchange rates are a little outdated in this example, but the point stands:

The "price" of a bitcoin is exactly what someone somewhere is willing to pay for it, and someone else is willing to sell it for.

MtGox provides a place for people who want to buy bitcoins and people who want to sell bitcoins to find each other.

Example:

Albert has 100 BTC.  He needs to pay his electric bill and the electric company doesn't accept bitcoin as payment.  He decides to convert some of his bitcoin to USD.  Albert logs on to MtGox and creates a limit order offering to sell 10 of his bitcoin for $33.45 each.  He is not willing to sell the bitcoin for less than $33.45 because at any price less than that he'd rather just hold on to the bitcoin and pay his electric bill with other funds.

Bobby only has a two bitcoin that he purchased at $32.50 each.  He decides that he doesn't really want bitcoin anymore, but he doesn't want to take loss.  He logs on to MtGox and creates a limit order offering to sell his two bitcoin for $32.55 each.

Carl has just received his paycheck.  After paying his expenses he has $200 left over.  He decides to purchase bitcoin with this money.  He feels like the exchange rate might drop a bit and so to get them as cheap as possible, he transfers his money to MtGox and creates a limit order to purchase 6.25 BTC at $32 each.

David just received an inheritance of $10,000. He decides he'd like to hold the entire balance as bitcoin.  He has seen the exchange rate varying between $31.50 and $33.50 lately, and hopes he can get the entire balance at $31.50.  He creates a limit order at MtGox for 317.460317 BTC at $31.50 each.

Earl is in a hurry.  He just wants to buy something from SilkRoad right now, and he'll take whatever the current exchange rate is.  He needs $60 worth of bitcoin.  He transfers his $60 to MtGox and places a market order for $60 worth of bitcoin.  MtGox sees that the cheapest offer to sell bitcoin at their site at the moment is Bobby's offer of 2 bitcoin at $32.55 each.  MtGox transfers the $60 from Earl to Bobby and at the same time transfers 1.84331797 bitcoin from Bobby to Earl.

At this hypothetical moment the current bitcoin price is therefore $32.55, since that is the most recent exchange that has occurred.
Earl now has 1.84331797 BTC
Bobby now has $60 and 0.15668203 BTC still available to purchase at an exchange rate of $32.55 per bitcoin.

Now Albert suddenly realizes that he doesn't have enough other funds for his bill.  He needs $334.50 right away to pay the bill, and needs to sell the bitcoin quickly to get the necessary money.  Albert cancels his limit order and places a market order to sell $334.50 worth of bitcoin.  MtGox sees that the most expensive offer to buy bitcoin at their site at the moment is Carl's offer of 6.25 bitcoin at $32 each.  MtGox transfers $200 from Carl to Albert, and 6.25 bitcoin from Albert to Carl.  Since Albert still needs another $134.50 worth of bitcoin to fulfill his order, MtGox sees that the next highest offer is David's offer of 317.460317 BTC at $31.50 each.  MtGox transfers 4.26984127 BTC from Albert to David, and $134.50 from David to Albert.

At this hypothetical moment the current bitcoin price is therefore $31.50, since that is the most recent exchange that has occurred.
Albert now has the $334.50 that he needs, and still has 89.4801587 BTC remaining.
Carl has picked up the 6.25 bitcoin that he wanted, spending the $200 that he wanted to spend.
David has purchased 4.26984127 for $134.50, and still has a limit order out there waiting to be filled for another 313.190467 bitcoin at $31.50 each.


You'll notice that there are actually many "prices" for bitcoin.  There is the price that each individual is willing to buy or sell their bitcoin for.  Some of the more often quoted prices are the "current Ask", "current Bid" and "most recent exchange".

Prior to Earl coming along, the "Current Ask" was Bobby's $32.55 that he is asking to sell his bitcoin (the lowest price anyone is willing to sell for at that time).
The "Current Bid" was Carl's $32 bid to purchase bitcoin from anyone willing to sell that cheap (the highest anyone is willing to pay to buy at that time).

[Mike Christ]

Economics 101

"I want that."

"I like this tho."

"I'll give you this much for it."

"I'll only sell it for this much."

"Okay deal."

Economics 102

"I really want that."

"I really like this tho."

"I'll give you more than I used to give you for it."

"Okay."

Economics 103

"I don't want this that much anymore."

"I really want to sell it tho."

"I'll give you this much less than I used to."

"I don't like it, but I'll take it."

I now congratulate you for completing these courses in "Why the hell is this priced this way?"

[evolve]

They aren't.

This is a speculative bubble, and people are buying them at this rate with the hopes to sell them later at a significant profit.

[stereotype]

The exchange rates are a little outdated in this example, but the point stands:

The "price" of a bitcoin is exactly what someone somewhere is willing to pay for it, and someone else is willing to sell it for.

MtGox provides a place for people who want to buy bitcoins and people who want to sell bitcoins to find each other.

Example:

Albert has 100 BTC.  He needs to pay his electric bill and the electric company doesn't accept bitcoin as payment.  He decides to convert some of his bitcoin to USD.  Albert logs on to MtGox and creates a limit order offering to sell 10 of his bitcoin for $33.45 each.  He is not willing to sell the bitcoin for less than $33.45 because at any price less than that he'd rather just hold on to the bitcoin and pay his electric bill with other funds.

Bobby only has a two bitcoin that he purchased at $32.50 each.  He decides that he doesn't really want bitcoin anymore, but he doesn't want to take loss.  He logs on to MtGox and creates a limit order offering to sell his two bitcoin for $32.55 each.

Carl has just received his paycheck.  After paying his expenses he has $200 left over.  He decides to purchase bitcoin with this money.  He feels like the exchange rate might drop a bit and so to get them as cheap as possible, he transfers his money to MtGox and creates a limit order to purchase 6.25 BTC at $32 each.

David just received an inheritance of $10,000. He decides he'd like to hold the entire balance as bitcoin.  He has seen the exchange rate varying between $31.50 and $33.50 lately, and hopes he can get the entire balance at $31.50.  He creates a limit order at MtGox for 317.460317 BTC at $31.50 each.

Earl is in a hurry.  He just wants to buy something from SilkRoad right now, and he'll take whatever the current exchange rate is.  He needs $60 worth of bitcoin.  He transfers his $60 to MtGox and places a market order for $60 worth of bitcoin.  MtGox sees that the cheapest offer to sell bitcoin at their site at the moment is Bobby's offer of 2 bitcoin at $32.55 each.  MtGox transfers the $60 from Earl to Bobby and at the same time transfers 1.84331797 bitcoin from Bobby to Earl.

At this hypothetical moment the current bitcoin price is therefore $32.55, since that is the most recent exchange that has occurred.
Earl now has 1.84331797 BTC
Bobby now has $60 and 0.15668203 BTC still available to purchase at an exchange rate of $32.55 per bitcoin.

Now Albert suddenly realizes that he doesn't have enough other funds for his bill.  He needs $334.50 right away to pay the bill, and needs to sell the bitcoin quickly to get the necessary money.  Albert cancels his limit order and places a market order to sell $334.50 worth of bitcoin.  MtGox sees that the most expensive offer to buy bitcoin at their site at the moment is Carl's offer of 6.25 bitcoin at $32 each.  MtGox transfers $200 from Carl to Albert, and 6.25 bitcoin from Albert to Carl.  Since Albert still needs another $134.50 worth of bitcoin to fulfill his order, MtGox sees that the next highest offer is David's offer of 317.460317 BTC at $31.50 each.  MtGox transfers 4.26984127 BTC from Albert to David, and $134.50 from David to Albert.

At this hypothetical moment the current bitcoin price is therefore $31.50, since that is the most recent exchange that has occurred.
Albert now has the $334.50 that he needs, and still has 89.4801587 BTC remaining.
Carl has picked up the 6.25 bitcoin that he wanted, spending the $200 that he wanted to spend.
David has purchased 4.26984127 for $134.50, and still has a limit order out there waiting to be filled for another 313.190467 bitcoin at $31.50 each.


You'll notice that there are actually many "prices" for bitcoin.  There is the price that each individual is willing to buy or sell their bitcoin for.  Some of the more often quoted prices are the "current Ask", "current Bid" and "most recent exchange".

Prior to Earl coming along, the "Current Ask" was Bobby's $32.55 that he is asking to sell his bitcoin (the lowest price anyone is willing to sell for at that time).
The "Current Bid" was Carl's $32 bid to purchase bitcoin from anyone willing to sell that cheap (the highest anyone is willing to pay to buy at that time).

I like that. Its a perfect demonstration of all the kinds of players and participants in any given market, not including brokers, speculators, traders, investors etc. and each one of those has their own price, which represents to them, value.
A traded price could be explained as an agreement of value between two parties, at that time. 

[Peter Lambert]

The price of bitcoins reflects what people expect to be able to get for them at some point in the future. I am willing to do work for 1 btc today because I expect I can use that 1 btc to pay for the things I need tomorrow. I am willing to pay $70 for 1 btc today because I expect I can get at least $70 worth of stuff tomorrow. Somebody sells me that 1 btc today because they need my $70 to pay for things like power bills or taxes or a new car.

[d5000]

One can view it from another point of view:

The minimal bitcoin unit is the "satoshi", which is 0.00000001 "bitcoin".
In most currencies the minimal unit is the cent (0.01 $).

1 satoshi is worth only 0.0000007 USD, or 0.00007 cent.

1 mBTC, which is 1/1000 BTC and 100000 satoshi, is about 7 cent.

Bitcoin is cheap

[Adrian-x]

I understand that the market reaches this consensus through buyers and sellers placing their bids and asks on the exchanges, but WHY is a Bitcoin worth that price?

If Bitcoins were at $50 right now we would all probably think that was completely reasonable.  If they were trading at $1000 a Bitcoin we would accept that too.  Do buyers just pick arbitrary sell prices in their head, and then sellers pick arbitrary buy prices, and then the market reaches a consensus?  Does anyone actually have a good understand of this or is there no "good answer".  Thanks.

I don't know the actual numbers, no one can, but I have a principled guidelines based on a rough mental picture obtained as a result of something my wife callas a Bitcoin obsession.

If M1 money supply = BTC market Cap
And
US GDP =  BTC GDP
And you were to drawer a similar relationship to the two GDP's then you would expect the price to be around $2 per Bitcoin, at this time. The "market" aside, that's what the intrinsic value of Bitcoin as a medium of exchange, could arguable be. 

Given my principles have cost me a small fortune - allowing me, with good reason to sell out in the low teens, I have changed my principals. 

My new principled guidelines (emphasis on principled) see human nature as the driving force, it is more refined and has evolved surpassing that of our ancestral apes, who once picked up shiny objects and fought over them, eventually refining an interconnected society based on trade and plunder with one of the most durable shiny elements gold.

 Now I see value in the finite aspect of Bitcoin, as the shiny gold we so all longed for is locked away in volts and we have fulfilled our desire for shiny objects through market forces that have lavished us with new cars, cell phones or Charismas cracker ornaments.

So we buy Bitcoin's, because there are only 21M of them and he who has the most wins, and it doesn't matter what they cost because you won't tell anyone how many you have anyway. This will go on for generations, all the while desire and greed will be held in balance and provide socially with a p2p socialist managed savings system that cannot be manipulated by any other force but that of the lack of desire and greed.  And so that is how we get to the price today.

[Adrian-x]

They aren't.
This is a speculative bubble, and people are buying them at this rate with the hopes to sell them later at a significant profit.

People are buying them at this rate with the hopes to sell them later at a significant profit or as I see it, also buying Bitcoin's as a saving to avoiding inflation.

In which case if the used base is growing, it may not be a speculative bubble unless the "Bitcoin Nouveau riche" cash out too quickly, instead of slowly dispersing the currency, or the speculators decide to sell there Bitcoin at a significant loss. 

[BTCLuke]

In the words of Falkvinge: "Bitcoin is a transactional currency. As such, it is competing for market share on the transactional currency market... When you know the size of the target market, and have an estimate for your projected market share, you can estimate the value of your product or service as a percentage of the value of the total market. "

...Not a bubble.

[evolve]

...Not a bubble.

Nope, not at all...









..perfectly natural and sustainable growth.     

[Wekkel]

It's your trained mind that is holding you down.

[Vladimir]

http://www.youtube.com/watch?v=uAXtO5dMqEI

[Nite69]

You can compare to this:

https://en.wikipedia.org/wiki/File:Gold_price_in_USD.png

[evolve]

Don't tell anyone, but precious metals are in a bubble too....

[Nite69]

Ok, tell me then, what is the correct price for one bitcoin.

If you know it, don't forget to tell why.

[yocko06]

my opinion is bitcoin is worth a whole lot more that any recent prices we have seen. If you look at all the advantages of bitcoin such as freedom of money transfer, ease of use, low to no fee's, privacy, anonymity, security ect... Plus you add the finite amount of bitcoin available to the world 21 million you can do the maths. when there is 21 million users of bitcoin what will 1 bitcoin be worth?
when there is a world full of bitcoin users then what will bitcoin be worth?
Not that it is a good thing but bitcoin would be very useful and appealing to criminals. They estimate that crime turns over 200 billion dollars a year and growing.  with 11 million bitcoin's currently mined and half of the crime turnover goes into bitcoin that leaves bitcoin at about $9000 each without considering that this big demand will push the price though the roof.
this is only one type of bitcoin user group.
Bitcoin is still a baby and needs time to grow, as new programs and services become available making bitcoin easy for everyone to use without needing to understand it people with use bitcoin without even thinking and it will be massive.
I used the crime stats not because I condone it in anyway but just as an example of a user group witch will use it regardless of law's and to show it's real value in a real world situation.
Bitcoin will be much bigger than crime, It is freedom returning to a slave monetary system. Everyone will be happy with this.