How to Determine Fair Rate of Exchange For Bitcoin

[FreeTrade]

Let's imagine I agree to sell 100 Bitcoin to a friend for USD. We're friends, so we don't want to haggle or negotiate over half a percent, we just want to look up the 'market rate' at a current instant and fix the price to do the exchange. So we look up MtGox and notice that is plenty of data of what's going on in the market - what's a good way to use it to settle a 'fair' price?

We might use the last trade price . . but that might be right after a large buy or sell order.
We might use the difference between the current buy/sell price, but those might be very low volume.
We might use the current cost to buy 100 BTC on MtGox, but that favours the seller.
We might use the current amount to sell 100 BTC on MtGox, but that favours the buyer.
We might use the current cost to buy 10000BTC and the current amount to sell 10000BTC and average the two - but even that might be subject to manipulation and not represent a 'fair' rate.

In practice, all these figures will be within 1% of each other in typical trading, and my friend and I wouldn't lose any sleep over it. So I'm not interested so much in the practicality of it - more the theoretical idea of what figure represents a fair price, for a known amount, at a current instant, without trading on an exchange.

[flower1024]

Let's imagine I agree to sell 100 Bitcoin to a friend for USD. We're friends, so we don't want to haggle or negotiate over half a percent, we just want to look up the 'market rate' at a current instant and fix the price to do the exchange. So we look up MtGox and notice that is plenty of data of what's going on in the market - what's a good way to use it to settle a 'fair' price?

We might use the last trade price . . but that might be right after a large buy or sell order.
We might use the difference between the current buy/sell price, but those might be very low volume.
We might use the current cost to buy 100 BTC on MtGox, but that favours the seller.
We might use the current amount to sell 100 BTC on MtGox, but that favours the buyer.
We might use the current cost to buy 10000BTC and the current amount to sell 10000BTC and average the two - but even that might be subject to manipulation and not represent a 'fair' rate.

In practice, all these figures will be within 1% of each other in typical trading, and my friend and I wouldn't lose any sleep over it. So I'm not interested so much in the practicality of it - more the theoretical idea of what figure represents a fair price, for a known amount, at a current instant, without trading on an exchange.

i did the same with my best a week ago and we decided to use the average price per bitcoin of the last 30 days...

maybe the price of "cheaper in bitcoins" is a good indication too?

he update his price on a monthly base - and you can actually buy stuff with bitcoins to the price he tells us (https://cheaperinbitcoins.com/)

[FreeTrade]

i did the same with my best a week ago and we decided to use the average price per bitcoin of the last 30 days...

I hope you were selling! I'd say a fair price a week ago was around $6, but the average for the previous month was more like $9! I'd be worried about losing friends using that method.

maybe the price of "cheaper in bitcoins" is a good indication too?

he update his price on a monthly base - and you can actually buy stuff with bitcoins to the price he tells us (https://cheaperinbitcoins.com/)

It's an interesting approach to price things in bitcoins - the statement there today is 'Todays locked in Bitcoin value is $6.09' - indicates that it might be calculated once a day. That might leave him open to abuse in the event of a sudden drop in value of BTC.

[deepceleron]

There isn't much of a spread between buys and sells on mtgox. You can look at the Clark Moody realtime data and pick a price between the bid and ask. Right now it would be between 5.85596 and 5.87499.

Note that mtgox has a 0.6% fee for buying bitcoins, and a 0.6% fee for selling them, so they actually get 1.2% per trade. Look here where I bought them, you see that for my 4BTC purchase, I actually got only 3.976 BTC (and the seller only got $18.72 instead of $18.84):

Thu 15 Sep 2011 In    BTC bought: 4.00000000 BTC at $4.71000    4.00000000 BTC    8.07465636 BTC
Thu 15 Sep 2011 Fee    BTC bought: 4.00000000 BTC at $4.71000 (0.6% fee)    0.02400000 BTC    8.05065636 BTC

(See how clever, mtgox takes the fees from the currency you received, so the fee is actually higher than they say....)

Important, of course, is how much bitcoins are worth to you; if you aren't selling them at the current prices, why would you sell to a friend? Your friend also shouldn't pay more than the going rate either though.

I would say the correct price to sell your BTC in person is the same price you (or your friend) would instant pay on an exchange to replace them (the ask price for buying that many coins off the book * 1.006036). For your friend it's easier to give you the cash than to give mtgox all his info and transfer money and wait, so you are still providing a service for zero fee.

[flower1024]

i did the same with my best a week ago and we decided to use the average price per bitcoin of the last 30 days...

I hope you were selling! I'd say a fair price a week ago was around $6, but the average for the previous month was more like $9! I'd be worried about losing friends using that method.

as we are good friends i do not really care... just wanted to find a fair price.

It's an interesting approach to price things in bitcoins - the statement there today is 'Todays locked in Bitcoin value is $6.09' - indicates that it might be calculated once a day. That might leave him open to abuse in the event of a sudden drop in value of BTC.

you're right.,.. he changed it a few weeks ago (after the 9/11 drop)

[FreeTrade]

Important, of course, is how much bitcoins are worth to you; if you aren't selling them at the current prices, why would you sell to a friend? Your friend also shouldn't pay more than the going rate either though.

We might observe that dealing directly would avoid exchange fees and risks, and also bid/offer spread.

I would say the correct price to sell your BTC in person is the same price you (or your friend) would instant pay on an exchange to replace them (the ask price for buying that many coins off the book * 1.006036). For your friend it's easier to give you the cash than to give mtgox all his info and transfer money and wait; so you are still providing a service for zero fee.

You make a good point - but again I'm more interested in the theoretical question of a fair (off-exchange) price rather than a practical transaction.

Let me reframe the question so that my own interests are explicity removed from the question . . .

Imagine one of my friends is selling something of considerable value, say a house, to another friend of mine. They agree that a price of $100,000 (USD) is fair, but they both want to settle directly in BTC. They ask me what a fair price in BTC would be so that neither was gaining an advantage over the other. I note that the amount involved would be enough to move the market price of BTC. How would I answer and back it up?

[deepceleron]

Imagine one of my friends is selling something of considerable value, say a house, to another friend of mine. They agree that a price of $100,000 (USD) is fair, but they both want to settle directly in BTC. They ask me what a fair price in BTC would be so that neither was gaining an advantage over the other.

I gave my example as a fair price for $->BTC, to think of it as simply buying bitcoins for your friend by proxy (even if it comes from your own account balance and you aren't immediately clicking "buy" on an exchange to replace the ones you are selling.)

In the case above, you have just added a second layer to bargaining over investment value, and the value would really be what both can agree on, so there is no "right" answer.

Bargaining for bitcoins would be like bargaining on the price of that house, and factors that affect perception of what would be a fair price:

• how much has it historically been worth?
• do you think the value will go up in the future, or are prices on a long decline?
• has it unreasonably appreciated, was it bought cheap and it's now selling high?
• is the property a better investment than holding onto the cash?
• is nobody else buying?
• how badly does the person need to sell?
• does the seller want that currency (dollars? stock options? bitcoins? gold bars?), would they want a premium to take an unconventional currency?

Currency exchanges have values that are instantaneous and transmitted around the world, and transactions that take place in one currency can be instantly valued and priced in another. You are basically asking a similar question to "if I was in a back-alley in Ukraine and needed to exchange currency, how much is it worth" - it depends on how much they like dollars there, and how bad you need to eat.

[FreeTrade]

Bargaining for bitcoins would be like bargaining on the price of that house, and factors that affect perception of what would be a fair price:

• how much has it historically been worth?
• do you think the value will go up in the future, or are prices on a long decline?
• has it unreasonably appreciated, was it bought cheap and it's now selling high?
• is the property a better investment than holding onto the cash?
• is nobody else buying?

Let's assume this information (or the best approximation of this information) is encoded in the current bids/asks on the exchanges, say a single exchange, MtGox for the purposes of this question.

• how badly does the person need to sell?
• does the seller want that currency (dollars? stock options? bitcoins? gold bars?), would they want a premium to take an unconventional currency?

Again, for the purposes of this hypothetical question, we'll assume that the seller of the house generally wants BTC and wants rid of USD, and the buyer generally wants rid of BTC and wants USD, and that the desires match equally, cancelling out this factor. 

Currency exchanges have values that are instantaneous and transmitted around the world, and transactions that take place in one currency can be instantly valued and priced in another. You are basically asking a similar question to "if I was in a back-alley in Ukraine and needed to exchange currency, how much is it worth" - it depends on how much they like dollars there, and how bad you need to eat.

I think my question is more like - 'if I was standing in front of the Forex counter in Kiev Zhuliany Airport, looking at the buy/sell prices, how would I use that information to infer a fair price with which to trade with my friend'

[nmat]

I would use the 24h average from bitcoinwatch

[snoopy]

I would use the 24h average from bitcoinwatch

+1. This is probably about as good as you're going to do, realistically.

[ovidiusoft]

I use 24h average, too.

[simplelove]

You cant. its called monopoly. the few big companies are controlling the market. they raise their price during Christmas... and there's nothing we can do? pay more? maybe.. but just look it at.. without them the fluctuation is virtually non-existence. always 4-6 no more than 10.

[mintymark]

I wondered this too. I was looking at it from the point of view of interesting potential merchants, persuading them to quote BTC prices so I wanted a realistic idea of what they would get.

I picked two sums of money,  £500, and £5000 and lined up the current orders totalling that amount on Intersango. Then do the calculation. The calculation still runs at hourly intervals and can be seen here:

http://jetmark.co.uk/bitcoin/rate.php

Perhaps if I was doing this again, I might take both ask and bid prices into account, but I have found it useful over a perod of months to see what I could actually get for £500 of bitcoins if I did the exchange right now.

[deepceleron]

You cant.

I knew if we waited long enough, there would finally be someone informed enough to answer this six-month old thread.

[GroundRod]

@deepceleron - SimpleLove sure does have the short, simple and correct answer. 

Going to take a very long time for old minds to get over thinking in terms of fiat and currency conversion standards, mine included.  As a Newbie, feel free to correct me.  It seems the Exchanges can seek out an answer, but there needs to be thousands of them running, maybe more.  Not 80% of the market owned & operated by one organization located where?  Tokyo right, isn't that were MtGox is located.  Last I heard the Japanese economy was scheduled for demolition and with electrical power cutbacks in the country, plus known radiation problems near by, that whole area could become a waste land or at the very least cutoff from terrestrial IP communications.  BitCoin price volatility is likely to be very high, even without any of those worst case scenarios happening.  On top of that, we've got those few lizards behind the current system, willing to do just about anything, to see BitCoins destroyed.  Fine pickle we've allowed ourselves to get in, being human.

BitCoins are a ray of hope, that is why I'm now a happy operator of the wallet program & current transaction chain.  Declare myself sovereign & just like thousands (soon to be millions?) of other like minded people, scattered around the globe, whom maintain their copy of the blockchain, it's all about taking personal responsibility for that idea [money], nothing more.

Been considering setting up an account with MtGox, but gees Dwello(sp) is definitely not going to be getting my business.  IMHO the value of a BitCoin will ultimately boil down to how many potatoes, peas or carrots I'm willing to sell you, and the only exchange of value one can honestly look at between [true] friends is not something you can put a price on, if a friend needs a few BitCoins to get started, you just give it to them.  Beyond that, let them deal with the exchanges, potential loss of funds and conversion factors...

@mintymark - From the POV of a merchant to his peers, that looks to be a useful perspective.