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

[pixelated]

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)?

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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?

[Herbert2020]

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.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.

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"

[EXtremeAEX]

It is being determined based on supply and demand.

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.

Furthermore, how do different exchanges reach on the consensus for a price?

The exchanges are just platforms that allow people *that are* selling and buying bitcoin to meet each other. If the difference *of BTC in different exchange sites* *is significant *then people from other places will come to the exchange with different price and make trades in a way to balance things out.

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. ^_^

[Windpower]

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)?

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.

[RedditMaster]

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)?

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.

[talkbitcoin]

... the volatility of the cryptocurrencies. ...

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.

[pixelated]

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)?

[pixelated]

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.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.

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.

True, my question is for efficient markets (rather exchanges), whenever they'll be, where there is limited or no scope of arbitrage.

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"

Thanks for pointing that out.

[pixelated]

@Herbert2020:
1) My question is for efficient markets (rather exchanges), whenever they'll be, which do not leave you with any scope of arbitrage.
2) Yes, centralized market can not determine price for everything but it can determine prices for raw materials/ taxes that'll have trickle down effect. Again, dissecting those markets is far more tedious and vagueness will increase exponentially. That's why I was hoping for a simpler and straightforward answer for a system that's rather new in place and decentralized.

@Windpower
1) I understand that people are ready to pay premium and I would not have asked the question had their been a bidding process.

Summary:
My question is simple (even if the answer is complex). Who is calculating the price and where can I see it being calculated. There's always been this gap in Economics where we start all mathematical, then we insert efficient market theories and voila we've magically determined a price. Backtracking that in normal markets is rather a rabbit hole but shouldn't be that bad in the cryptocurrency markets, hopefully?

Would someone be nice enough to start with an example and take it all the way to end to show how the price was determined? You can pick up a newer altcoin that does not have as much volatility/ volume to simplify the example.

I'm hoping for an answer like this:
a) The dev(s) launched coin <name> on Day 0 and came up with price P1 that was hardcoded <here>
b) Miners/ innovation/ difficulty level etc factors cause an increase/ decrease of <amount/ percentage here>
c) Thus, at time T1 of launch the price was calculated by <this> to be <this much>
d) At time T2 price increased/ decreased by <this much percentage> or became <this much>

Not a very elegant primer, but hopefully you get an idea. It's the derivation of the price step by step than the theoretical knowledge that I hope to find here.

[DOGE12321]

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)?

I would presume that exchanges would average the price that Bitcoin is being sold for by traders and merchants. From this they would get and approximate price. There would probably be a few discrepancies between the exchanges but it would not be a major difference. Moreover, site like http://preev.com/ would most probably attain the average from the various exchanges available.

I don't think you would need to move this topic. If the moderators have not moved it to a different location it should be fine. But if you insist, there is a button at the bottom of the page saying move topic. I presume you click that.

[Barbarian]

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)?

Supply and demand is not theoretical is a known fact, the price is calculated by the amount of coins there are, known as supply and the money in the market cap of bitcoin, demand, divide those numbers and you get the price of bitcoin, it does not get easier than that.

[Amph]

don't compare the volatility of some alt with bitcoin, altcoin have no volume it's easy to manipulate anyone with few thousands dollars can make the market at his disposal, especially on those new shitcoin

on the other hand bitcoin, have real supply and demand, people willing to buy at certain price because they are believer because they need bitcoin to buy stuff, there is an usage of bitcoin and demand for that is what making the price increase

also the miners don't have any factor here, what matter are always the buyers, which are also sellers, if they need to dump and go out of the market

[pixelated]

Thanks again,  but I re-iterate on the primer from #10 adding the pointers from

I'm hoping for an answer like this:
a) The dev(s) launched coin <name> on Day 0 and came up with price P1 that was hardcoded <here>
b) Miners/ innovation/ difficulty level etc factors cause an increase/ decrease of <amount/ percentage here>
c) Thus, at time T1 of launch the price was calculated by <this> to be <this much>
d) At time T2 price increased/ decreased by <this much percentage> or became <this much>

Or including the merchant (like @DOGE12321 said)
e) Merchant M1 derived price PM1 <here>, M2 derived price PM2 <here>
f) Exchange E1 averaged prices PM1, PM2.. and came up with it's price PE1, exchange E2 likewise came with PE2
g) preev averaged the prices PE1, PE2...

Not a very elegant primer, but hopefully you get an idea. It's the derivation of the price step by step than the theoretical knowledge that I hope to find here.

[Xavofat]

a) The dev(s) launched coin <name> on Day 0 and came up with price P1 that was hardcoded <here>

Bitcoin was not created with a price.  Its price is solely caused by the market.  Developers have absolutely no power over what the price of Bitcoin is, except for the coins that they own themselves.

b) Miners/ innovation/ difficulty level etc factors cause an increase/ decrease of <amount/ percentage here>

These are not precise at all.  It's just fundamental analysis, the exact same kind of analysis you do on any stock or commodity.


I feel like you're just missing the point altogether.  There's no one sitting in their room saying "I think I'll set the BTC price at $2500 today, but I'll fluctuate it around that range". 

Are you just looking for the fundamental causes of price movements, or do you genuinely have that misconception?

[Hydrogen]

It might be accurate to say the price of decentralized currencies are determined by many of the same market forces which determine the prices of other more standardized currencies.

There may not be any major differences other than ownership demographics(in terms of proportion), the means of currency production(crypto mining vs central bank issued), trading not being optimized in favor of HFT(darkpools) and a few other things.

[odolvlobo]

Reading this thread, I am hesitant to jump in.

@pixelated: There is no "the price". Every transaction has its own price. Every trade on every exchange has its own price. Every time something is traded for bitcoins, the price for those bitcoins is determined by the parties in the trade.

Typically, when somebody reports "the price", they are reporting the price of the bitcoins in the last trade reported by a particular exchange. Sometimes, an average of trades (over time and/or across exchanges) is used to report "the price" in order to reduce the perceived volatility and increase perceived coherence.

Nobody tells parties in a trade what the price for that trade should be. The price is reached by agreement. Typically, the function of an exchange is to help traders find other traders willing to trade at the same price, so the agreement on price is already reached before the trade is initiated.

[fanbeila]

Bitcoin price is determined by the price which investors are ready to pay for it.Bitcoin price is driven by the community support.Since it is a decentralized currency,there is no central authority to decide its price.Its price increases or decreases with variation in demand for bitcoin.So,its price is always unstable.

[co0ler]

It is difficult to reach an answer that does not lead to a simple balance of supply and demand, and I think there is not much mystery. Price is what people pay for it. Unless you choose to believe that the price is controlled by manipulators and trading bots.

[Kevin77]

It is difficult to reach an answer that does not lead to a simple balance of supply and demand, and I think there is not much mystery. Price is what people pay for it. Unless you choose to believe that the price is controlled by manipulators and trading bots.

Now that’s where most of the people get it wrong. People say that only Bitcoin is volatile, forgetting that whatever that is called currency is volatile being compared to a different currency. Take for example, the USD and Euro, when being monitored, you will notice that sometimes the rate for dollars increases, and sometimes it goes down, so tell me why dollar is not volatile.

Everything called currency is volatile, whether you believe or not. Now for how the price of Bitcoin is determined: I think how it is determined is by calculated how much that is being invested into it. The same policy that is being used for fiat is also used for Bitcoin.