I have finally gotten around to examining bitcoin and other cryptocurrencies more closely. I have followed traditional trading on the Exchanges for quite some time. My question is, how is the price of bitcoin determined? Is it like in stock and commodity trading, where it is determined by bid and ask?
This may be a key question for the long-term success of bitcoin. I realize that many on this trading discussion view bitcoin as a means to make money. However, for most people, the goal is an alternative to fiat currency, which can be inflated away at the whim of central banks. The concept behind bitcoin is that, unlike fiat currency, it has to be mined, and a limited number will ever be created. However, we already have this in physical coins, such as gold coins, which have to be physically mined and are limited in number.
The problem with valuable commodities such as gold is that the price is determined on trading exchanges, most of which are controlled by institutions with the implicit backing of central banks, such as JP Morgan. Such institutions simply "naked sell" down the prices of commodities such as gold by using enough fiat dollars to sell down the price. For that reason, the price remains low in relationship to fiat currencies, and really is not independent of the fiat currency, nor an ideal hedge against inflation.
What makes bitcoin and other cryptocurrencies different from this? If the price is determined by who has enough money to increase or decrease the price at their whim, then how would bitcoin be able to be a truly free and independent currency that can be used in the face of fiat currency inflation?
Believe me, I am all for a currency that is for the people, by the people, not controlled by any central bank. Any answers would be much appreciated!
Trading on a BTC exchange like btc-e, or bitstamp is based on the traditional bid/ask market (much like if not exactly like trading on the NYSE or nasdaq).
Trading in person and on sites like localbitcoins (and similar sites) is based on prices of exchanges (see above) and will have a premium or a discount based on the incentives of the buyers and sellers. For example if a seller wishes to sell his/her BTC quickly and receive cash quickly they may set a larger discount to the trading price on a major exchange.
