How is the value of bitcoin calculated

[anu]

Is it just by exchanges who change the prices based on how much money they want to make? This is one thing I am concerned about bitcoin by. How is the value calculated?

Deja Vu!

I've come across this question before several times - when giving my Bitcoin presentation at the MobileMoney Africa in Lagos, for example. To most of us, this sounds like the wrong question, or rather, not even wrong. But it is a fact that in many places, people are so conditioned by state "education" that the concept of a market and thus, market driven price discovery, is alien to them. They are familiar only with prices being dictated - things cannot possibly work if they are not controlled by a central authority.

Welcome to the real world, Neo.

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[Mike Christ]

Welcome to the real world, Neo.

Awesome reference   And I recommend watching The Matrix again to anyone who "gets" how society works now; it's a beautiful allegory based on Plato's.

[xxjs]

I see so just some condecending comments with actually no basis. There is no need for this level of immaturity when I am hoping someone will correct me in what I am saying. I was not expecting that! You are not representing bitcoin very well anyway

I can correct you right there: It is nobodys duty to educate you.

[anu]

I see so just some condecending comments with actually no basis. There is no need for this level of immaturity when I am hoping someone will correct me in what I am saying. I was not expecting that! You are not representing bitcoin very well anyway

I can correct you right there: It is nobodys duty to educate you.

That is correct. But neither did he say or imply that nor is it anyone's duty to bash people who are trying to learn. Being libertarian doesn't imply being an asshole.

[Scott J]

Is it just by exchanges who change the prices based on how much money they want to make? This is one thing I am concerned about bitcoin by. How is the value calculated?

The people who have bitcoins offer them for different prices, the people who want bitcoins offer to buy them for different prices. When a bid and a sell offer coincide that is the price of a bitcoin.

It is not the exchanges who set the price, it is the individual users who agree on the price. The exchange just brings buyers and sellers together in one place.

I dont agree with this. The people sell their bitcoins based on what the exchanges say. YOu buy based on what the exchanges say too. I cant go out today and buy a coin for 20 pounds because the exchanges have valued them at 80 pounds. I cant sell a bitcoin at 200 pounds because the exchanges say 80 pounds etc etc.

I was passionate about bicoin until I realised this. I even started a business with them. But now after this stark realisation I think I will be sticking to pounds.

Just in case you are not trolling....

You can buy a bitcoin for 20 pounds or sell one for 200 pounds on an exchange.... provided there is another person on that exchange who wants to make such a trade.

This is the fairest way to decide price - people offer what they think a bitcoin is worth and others can choose to match it or make their own offer.

Can you think of a fairer way to decide the price?

[Le Happy Merchant]

I see so just some condecending comments with actually no basis. There is no need for this level of immaturity when I am hoping someone will correct me in what I am saying. I was not expecting that! You are not representing bitcoin very well anyway

Long story short: several people earnestly tried to explain to you what you asked, you disagreed with reality, and became angry.

For the record, Mt. Gox had it's US dollars denominated dwolla account locked, not any Bitcoin wallet.

[JimboToronto]

     notsureiftrolling.gif

Walks like a duck, quacks like a duck...

 

[thezerg]

When people talk about exchanges manipulating the price to make $, they are talking about something a lot more subtle than that.  

Basically let's say the current price of BTC is 89, so there are sellers on the exchange willing to sell at prices between 90-110.  Now someone makes a big buy.  The exchange "sees" the big buy and knows it will drive the price to 105 so it quickly injects its own purchase to grab all coins for sale from 90-91 (for example).  Next, it lets the large buy through and so the price of BTC rises to 105.  Buyers see this move but they still want coins so they increase their bids up to 100.  So the exchange got coins at 90 and can now slowly unload them at around 100.  Or wait for a big seller and do the same thing in the other direction.  This is called "front-running" the market.

But as you can see the exchange is not really able to set or manipulate the price; it can only grab a bit of dishonest profit for themselves by reacting to early information about other people's buy/sell action.  Who loses?  Well, the buyer got cheated a little; he was expecting some coins at 90 but his lowest coin purchase was 91.

Do you mean like market making bots with tiered order books?.... Like the big boys in Wallstreet?  You're right.  That would be terrible.

Not just bots which anybody runs, bot run by the exchange itself which respond to orders before placing them on the exchange. Sort of an insider knowledge of upcoming trades giving them an unfair advantage.

This seems rather paranoid, but there is little you could do to prove it was happening.

Yes exactly.  The implicit (and sometimes explicit) contract of an exchange is to provide a level playing field where buyers and sellers all have an equal chance to make a trade.  This stops at the router leaving the exchange.  If you then rent a rack right next to that router and overclock it, more power to you!

At the same time, I think that exchanges should place all transactions -- buys, sells AND bid/ask adjustments -- in a single order-received queue.  So the owner of a big wall can't "see" a big buy eating through the asks in front of the wall and quickly remove the wall...

 

[notme]

When people talk about exchanges manipulating the price to make $, they are talking about something a lot more subtle than that.  

Basically let's say the current price of BTC is 89, so there are sellers on the exchange willing to sell at prices between 90-110.  Now someone makes a big buy.  The exchange "sees" the big buy and knows it will drive the price to 105 so it quickly injects its own purchase to grab all coins for sale from 90-91 (for example).  Next, it lets the large buy through and so the price of BTC rises to 105.  Buyers see this move but they still want coins so they increase their bids up to 100.  So the exchange got coins at 90 and can now slowly unload them at around 100.  Or wait for a big seller and do the same thing in the other direction.  This is called "front-running" the market.

But as you can see the exchange is not really able to set or manipulate the price; it can only grab a bit of dishonest profit for themselves by reacting to early information about other people's buy/sell action.  Who loses?  Well, the buyer got cheated a little; he was expecting some coins at 90 but his lowest coin purchase was 91.

Do you mean like market making bots with tiered order books?.... Like the big boys in Wallstreet?  You're right.  That would be terrible.

Not just bots which anybody runs, bot run by the exchange itself which respond to orders before placing them on the exchange. Sort of an insider knowledge of upcoming trades giving them an unfair advantage.

This seems rather paranoid, but there is little you could do to prove it was happening.

The bots on wall street still have access to retail orders before they hit the official books.  There is no functional difference from what you are describing.  It is just that the wall street exchanges have covered their ass by just selling access to the data rather than operating the bots themselves.

[Peter Lambert]

Is it just by exchanges who change the prices based on how much money they want to make? This is one thing I am concerned about bitcoin by. How is the value calculated?

I've come across this question before several times - when giving my Bitcoin presentation at the MobileMoney Africa in Lagos, for example. To most of us, this sounds like the wrong question, or rather, not even wrong. But it is a fact that in many places, people are so conditioned by state "education" that the concept of a market and thus, market driven price discovery, is alien to them. They are familiar only with prices being dictated - things cannot possibly work if they are not controlled by a central authority.

Welcome to the real world, Neo.

Also, remember that the exchange commission is based on volume. If they tried to manipulate the price up to get more money, people would just buy fewer bitcoins and so the exchanges commission would not change.

[johnyj]

Actually I don't think large exchanges are good places to look for the real exchange value, since all the coins and USD are mixed together at MTGOX, you never see the real trades

For example, you bought 10 coins at MTGOX with $1000, but that could be just some numbers displayed on your screen. It is possible that nothing happened in exchange at all, only some internal numbers changed in MTGOX's checkbook. They could easily create 1 billion fictive dollars and buy up all the coins on the market, as long as sellers do not require a withdraw, or they can't withdraw

But, there is one place that you could get a good evaluation about the sentiment: localbitcoins.com

All the trades there are real trades between private person. If you see the ask price there is much higher than the MTGOX price, then it means the sellers are not eager to sell . If they are eager to sell, they will lower the ask price, thus creating a black market for cheap coins

I always sell at MTGOX price on localbitcoins.com, but lately I have not received any bid, so I feel the sentiment is a little bit down due to price diff between MTGOX and Bitstamp. Since my ask is already the lowest on the exchange, I know that other people are not eager to sell currently

[gravitate]

jonyj that makes sense and that is exactly what I though! That is what worries me. Ficticious money floating around to set the bitcoin price. We all sell based on these prices and yet they could only be that price based on some people at mt gox  trying to get rich. What I am trying to say is it IS possible.

By the way I do understand what a free market principle is. As a teen I grew up trading rare items on runescape for physical CASH in my hand

But it seams you say one bad thing about bitcoin or raise a concern and suddenly you are a stupid idiot who loves spending money on credit card charges.

[johnyj]

jonyj that makes sense and that is exactly what I though! That is what worries me. Ficticious money floating around to set the bitcoin price. We all sell based on these prices and yet they could only be that price based on some people at mt gox  trying to get rich. What I am trying to say is it IS possible.

By the way I do understand what a free market principle is. As a teen I grew up trading rare items on runescape for physical CASH in my hand

But it seams you say one bad thing about bitcoin or raise a concern and suddenly you are a stupid idiot who loves spending money on credit card charges.

The supply and demand is a psychological phenomenon, the price from the largest exchange indeed has an effect on speculative demand. It is not possible to separate the commercial demand from the speculative demand, and speculative demand typically can create demand by itself (price rally cause more people to buy thus more price rally)

Anyway, it will be difficult for many exchanges to manipulate price simultaneously, you need more exchanges and more local dealers at escrow sites to reflect the real demand

[Tirapon]

If an exchange is to function properly, orders to both buy and sell must be filled. If I want to set up an exchange which artificially raises the price per bitcoin, I don't just get the benefit of being able to sell my coins at that higher rate - I must also buy coins from sellers at that price. If not, people will quickly realise that I am running a scam - for example, I set up an exchange and declare the price per bitcoin to be $200. Anyone seeing this rate would obviously choose to sell at my exchange instead of others, and would also see a nice opportunity to profit by buying elsewhere and selling to me. If I don't have the dollars to fill those orders, this forum would quickly fill with SCAM notifications about my exchange, and rightly so.

Exchanges actually operate by simply matching buyers and sellers, and taking a cut on every trade. Price gets evened out across exchanges by arbitrage trading. The reason for the big difference in price at the moment between Mt. Gox and the other exchanges is the difficulty people are having in withdrawing their fiat funds from Gox. Under normal conditions, the spread would quickly disappear as people buy coins elsewhere (creating upwards pressure) in order to sell for profit at Mt. Gox (downward pressure).

These are fairly simple market dynamics, although are often overlooked by people who are new to these concepts. I hope this has helped to shed some light on your question.

[chasetopher]

Actually I don't think large exchanges are good places to look for the real exchange value, since all the coins and USD are mixed together at MTGOX, you never see the real trades

For example, you bought 10 coins at MTGOX with $1000, but that could be just some numbers displayed on your screen. It is possible that nothing happened in exchange at all, only some internal numbers changed in MTGOX's checkbook. They could easily create 1 billion fictive dollars and buy up all the coins on the market, as long as sellers do not require a withdraw, or they can't withdraw

But, there is one place that you could get a good evaluation about the sentiment: localbitcoins.com

All the trades there are real trades between private person. If you see the ask price there is much higher than the MTGOX price, then it means the sellers are not eager to sell . If they are eager to sell, they will lower the ask price, thus creating a black market for cheap coins

I always sell at MTGOX price on localbitcoins.com, but lately I have not received any bid, so I feel the sentiment is a little bit down due to price diff between MTGOX and Bitstamp. Since my ask is already the lowest on the exchange, I know that other people are not eager to sell currently

I think once you understand how the Order Book works this will make more sense. YES, Mt. Gox does have huge piles of USD and BTC, and we you buy 1 BTC for $100 on their site, no money changes hands, you're correct, just some account balances in a database get changed. But it's important to understand that the seller's balances are ALSO being updated, and everything needs to equal out. You have to consider that when you buy 1 BTC at "market value", you are fulfilling the order of someone wanting to sell at a value that they chose. So while no money is trading hands, I am in fact being paired with a real person who wants to trade.

For them to "control the price", they'd have to be falsifying the order book. They'd have to make it appear that someone wants to sell at a high price when in fact no one does. This would be very hard for them to do especially considering their trading data is open and free to use. I highly doubt that they can fake this: http://markets.thegenesisblock.com.

[RodeoX]

Is it just by exchanges who change the prices based on how much money they want to make? This is one thing I am concerned about bitcoin by. How is the value calculated?

The people who have bitcoins offer them for different prices, the people who want bitcoins offer to buy them for different prices. When a bid and a sell offer coincide that is the price of a bitcoin.

It is not the exchanges who set the price, it is the individual users who agree on the price. The exchange just brings buyers and sellers together in one place.

There is really nothing more to be said. This is the answer. The simple market forces of supply and demand determine the price of bitcoin.

[xxjs]

Actually I don't think large exchanges are good places to look for the real exchange value, since all the coins and USD are mixed together at MTGOX, you never see the real trades

For example, you bought 10 coins at MTGOX with $1000, but that could be just some numbers displayed on your screen. It is possible that nothing happened in exchange at all, only some internal numbers changed in MTGOX's checkbook. They could easily create 1 billion fictive dollars and buy up all the coins on the market, as long as sellers do not require a withdraw, or they can't withdraw

But, there is one place that you could get a good evaluation about the sentiment: localbitcoins.com

All the trades there are real trades between private person. If you see the ask price there is much higher than the MTGOX price, then it means the sellers are not eager to sell . If they are eager to sell, they will lower the ask price, thus creating a black market for cheap coins

I always sell at MTGOX price on localbitcoins.com, but lately I have not received any bid, so I feel the sentiment is a little bit down due to price diff between MTGOX and Bitstamp. Since my ask is already the lowest on the exchange, I know that other people are not eager to sell currently

Of course an exchange could screw you over, and the trades could be imaginary. But as long as you are able to redeem your coins to your own wallet, you know it is real.

[johnyj]

I think once you understand how the Order Book works this will make more sense. YES, Mt. Gox does have huge piles of USD and BTC, and we you buy 1 BTC for $100 on their site, no money changes hands, you're correct, just some account balances in a database get changed. But it's important to understand that the seller's balances are ALSO being updated, and everything needs to equal out. You have to consider that when you buy 1 BTC at "market value", you are fulfilling the order of someone wanting to sell at a value that they chose. So while no money is trading hands, I am in fact being paired with a real person who wants to trade.

For them to "control the price", they'd have to be falsifying the order book. They'd have to make it appear that someone wants to sell at a high price when in fact no one does. This would be very hard for them to do especially considering their trading data is open and free to use. I highly doubt that they can fake this: http://markets.thegenesisblock.com.

They don't need to provide an artificial price, they only need to provide some artificial dollar, those "checkbook dollar" would buy up all the coins for sell and raise the exchange price, thus attract more deposits

As Tirapon mentioned, in such a case many people would like to sell at a higher price, and the seller's balance will be updated with a lot of USD. But, as long as they can't withdraw USD, those account balances can be just numbers without real USD behind them

Actually this is the nature of any kind of centralized financial institution, be it an exchange or a bank: As soon as your money are deposited into their account, they will be mixed with the funds from many other accounts and the institution could practice fractional reserve, e.g. only holding part of the funds to satisfy some of the customers' withdraw request. So, if a large amount of users are requesting USD withdraw at the same time, they simply deny it since they don't have that much. This is the same for banks.

But anyway, bitcoin's supply is very limited, my estimation is that currently only a couple of thousand coins were supplied each day for sell (A small part of those daily mined 3600 coins and some amount of sell from previous bitcoin owners). If people's confidence of bitcoin increase, these little supply are not enough to satisfy the expanding user interest