How is the price of a cryptocurrency like Bitcoin decided?


Supply and demand – two words we’ve all probably heard, learnt and are aware of. Price is generally affected by supply and demand apart from other variable factors. Fortune magazine’s Jen Wieczner says, “Bitcoin is also affected by hype. Other stocks aren’t generally so impacted by that”.

Hype plays an important role in attracting investors, thus the stock price of Bitcoin increases rapidly. This increase attracts yet another crowd of people until the price is overinflated. Wieczner thinks that there are market adjustments where the price goes about 20% down after the cryptocurrency hits a new high.

For example, let’s consider trading Bitcoin on Luno Exchange. Luno Exchange is a platform which allows buyers and sellers to exchange products, stock, currencies and Bitcoin. A specific price at a specific time for a specific market is set, not by Luno but by the traders and the trading they do.

A variety of factors

A few aspects to remember about Bitcoin when it comes to price setting and fluctuations are:

1. Bitcoin’s price isn’t set by anyone in particular. It’s set by the market.

2. Price varies.

3. For example, today the Bitcoin price on Google might be $600. Checking Bitcoin Price Index (provides the latest and accurate price) for the popular website CoinDesk, it might be $5500. Comparing with search results found on Winkdex, the Bitcoin price index operated by the Winklevoss twins, the figure might be $5700.

Now the big question here is, why the difference?

One reason could be the source of the data. Bitcoin isn’t traded in one place alone. Multiple exchanges support trading of Bitcoin. All set their own prices, based on the trades made by the exchange at any one particular time.

Hence, the price of Bitcoin fluctuates.

Another point to be noted is, you cannot trade Bitcoin using index sites because the sole purpose is aggregating price information. Indexes gather together prices from several exchanges but not all indexes use the same exchanges for their data.

Events affecting Bitcoin’s price

If a large government states that it’s uncertain regarding how to regulate Bitcoin, then that can cause the price to fall. Example: China.

Similarly, criminal activities and crimes can have an effect. Example: When the drug trading site Silk Road – which used Bitcoin as its currency – closed down, the price of Bitcoin plummeted.

The ownership of a limited number of Bitcoins circulating is unevenly distributed. Some Bitcoin giants are involved in the hoarding of such cryptocurrency. This combined with the lack of liquidity makes it easy for people to manipulate the market.

Manipulating the market is easy for those hoarding Bitcoin combined with lack of liquidity.

Price can be driven down by traders who sell Bitcoins in high volume. For instance, One trader,bear whale (the word whale is used to describe big time Bitcoin players) temporarily crashed the market that way.

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