Are you seriously considering earning with digital currency? Then you can't do without buying bitcoins or other cryptocurrencies! However, in financial transactions, it is essential to understand how the value of coins is formed, based on existing supply and demand – this is the key to making a profit.
The pricing policy of cryptocurrencies and Bitcoin differs significantly from traditional assets such as stocks and commodities. Their quotes are linked to some specific features that should be taken into account before buying bitcoins.
Fly-pay.io provides detailed information on how the price of virtual currency is determined.
What is the «price of Bitcoin»?
When talking about buying Bitcoin, it implies the possibility of acquiring it in US dollars. The exchange plays a fundamental role in determining the price policy of cryptocurrencies, based on parameters such as:
- key indicators on leading exchanges (for example, on Bitfinex or Binance);
- combined indicators obtained from averaged quotes on several exchanges.
When it comes to the price on a specific trading platform, it means discussing the indicators of the last deal made on that exchange. For example, if Bitcoin on Bitfinex is $10,000, then the last deal was concluded at this price. A new financial transaction will change this indicator in one direction or another.
It is important to note that there is no single price for Bitcoin – each platform will have its own indicator. This is because the currency is decentralized and is in circulation on multiple exchanges.
Price Formation
The cryptocurrency market has a major distinction – here, there is never talk of a decrease in price, and it is not predicted. Even in the case of a sharp decline, experts assure that the price of Bitcoin will rise.
The price of buying and selling bitcoins is largely determined by players with significant assets and general panic. These two factors have established a tendency for coins to have high volatility. Currency holders, using artificial excitement, intentionally devalue or raise it. Price jumps are especially noticeable on online charts. Global fluctuations will continue to occur, as there will always be people willing to invest in Bitcoin and profit from it.
The process of determining the pricing policy of cryptocurrencies is interesting in itself. The amount depends on the buyer and seller who meet on a cryptocurrency exchange or another trading platform. They determine the value that satisfies both parties through trial and error. Naturally, the buyer wants to buy coins cheaper, while the seller aims to sell them at a higher price. Players must come to a compromise and fix an indicator that will determine the current selling price of Bitcoin or another digital currency in the future.
Fly-pay.io explains how the necessary compromise between the buyer and seller is achieved on the cryptocurrency exchange.
Order Book
Every cryptocurrency exchange has what is known as an order book. It is a table with walls showing the market sentiment of buyers and sellers. The book displays information about orders to sell and buy bitcoins and cryptocurrencies, including data on price and quantity. This allows the player to understand the existing supply and demand on the trading exchange at any given moment. By properly analyzing the order book, a trader can make predictions about the potential decrease or increase in the value of the cryptocurrency.
Makers and Takers
Many believe that the price of selling bitcoins and other cryptocurrencies significantly changes when there are many buyers or sellers in the virtual market. However, this is a misconception: there are always an equal number of players on both sides. In reality, quotes change as players start trading. Additionally, the price rises when one side is willing to pay the spread – the difference between the highest buyer's bid and the lowest seller's ask.
For example, if a seller offers Bitcoin for $9,500, and an investor is willing to buy it for $9,450, the spread in this situation is $50. To complete the transaction, the difference must be paid. The party making the payment is called the taker, and the player who placed the order with volume and price is called the maker.
Takers and Cryptocurrency Prices
Continuing our story, suppose an investor is confident that the price of Bitcoin will rise to $10,000 in a couple of days. Then, they become a taker and, by paying the spread, buy the entire volume of cryptocurrency at a price of $9,500. If the price of Bitcoin increases, the buyer makes additional profit on the difference.
In this scenario, it is crucial to maintain an optimal position; otherwise, sellers will start increasing the ask price. The process ends when the resources of investors are exhausted, leading to a reverse effect. These «games» contribute to the rise and fall in the selling and buying prices of bitcoins.
Different Exchanges
The process described above occurs every day on hundreds of trading platforms worldwide. From this, it is clear that there is no official price for Bitcoin and cryptocurrency. Each exchange will have its own, different from others.
The balance is maintained by an arbitrage program that regulates the cost of cryptocurrency at approximately the same level.
Exchange Ambassadors
Leading cryptocurrency exchanges (Bitfinex, Binance, and Bitstamp) undoubtedly influence the price of coins. The indicators on these platforms have even earned the title of «official». This is because they have the highest trading volume.
If the price of cryptocurrency increases on one or all three platforms, it is likely to increase on all others. This pattern is explained by the fact that most traders rely on the ambassador exchanges.
Price Index
As mentioned earlier, there is no official value for virtual coins. However, some websites and companies calculate a cryptocurrency index based on available data. They average the cost indicators in different currencies and trading volumes. For example, the Bitcoin index on the BraveNewCoin website is determined according to US dollars, Chinese yuan, and euros.
The advantage of indices is that they neutralize the results of atypical trading on exchanges.
