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.
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.asphttps://en.wikipedia.org/wiki/Supply_and_demandusually 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.
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.
No.
being centralized or not has nothing to do with the price. the centralized government doesn't set the price of everything. and even if they do they still do it based on supply and demand.
for example in the winter clothes example, there is no centralized authority setting the price of a winter hat for example. the shops or the business owners decide that this year they can sell hats at $X higher than last year based on weather being colder and the demand being higher
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)?
no it is how the market will work. the exchanges don't sell bitcoin, the exchanges are just platforms that allow people selling and buying bitcoin to meet each other. and if people on one exchange decide to sell their coins the price goes lower and if they decide to buy more than other places the price goes higher. and if the difference becomes big enough to become profitable then people from other places will come to the exchange with different price and make trades in a way to balance things out.
for example if the price is lower on bitstamp like be $2000 people can go there and buy cheap coins until it comes back up to $2500 like other exchanges.
or if it is higher like $3000 they can go there and sell their coins until it comes down to $2500 like other places.
but it usually doesn't come to that point. if price goes to $2400 for example there will be more incentive by the same people on bitstamp to buy more until it comes up. or the same if it goes to $2600
the difference that you sometimes see is because some exchanges have trouble with deposits or withdrawals or have higher fees that leads to that incentive to trade there to be less.
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?
there is a button at the bottom left side of the page called "move topic"
The price is established by simple supply and demand that happens on markets that have enough liquidity to deliver price discovery.
The irony and also problem is that the price is established in centralized exchanges, so for a decentralized currency to exist, right now it depends on centralized exchanges to get a nice volume and constant price discovery. We must get to that and fix it. There are currenlty proposals for decentralized exchanges, but none of them deliver the fast velocity needed for proper substitution of centralized exchanges.
Hopefully with lightning network we can get instant buy/set orders set and fast price discovery but with a clever decentralized website-based solution with payment channels and whatnot.
Blocknet got some decentralized transactions happening but they aren't viable to replace the centralized exchanges because it's not web based.
