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What determines the price of bitcoin (BTC) and other cryptos?

Bitcoin

8 min read

While many people follow the price of Bitcoin , not everyone knows exactly how that price is determined. Bitcoin differs from traditional assets such as stocks or conventional financial products.

So there are some surprising differences in how its price is calculated. Here is a short article to shed some light on the price of bitcoin.

Indirectly, you will know more about what determines the price of other cryptocurrencies.

What does the term “Bitcoin price” really mean?

When discussing the price of Bitcoin, people generally refer to the price in USD on a major exchange such as Binance or CoinMarketCap. Often, they look at the average price displayed on one or more cryptocurrency exchanges.

When people talk about the price on a given exchange, they mean the price of the last transaction made on that exchange. So, for example, if the price of Bitcoin on Bitstamp is 5000 USD, this means that the last transaction made on Bitstamp closed at 5000 USD. Once a new transaction is made, the price will be updated accordingly.

Because bitcoin is a decentralized asset trading on hundreds of exchanges and between countless people around the world, there is, in fact, no precise bitcoin price. This is why it varies from one platform to another. Each exchange has its own price for bitcoin, although these prices are generally quite similar. Later in this article we'll look at what keeps all these prices in sync.

Let's start with a brief overview of how price is determined on a single crypto exchange.

Bitcoin price display

Price discovery describes the process by which buyers and sellers meet on an exchange (or elsewhere) to reach an agreement on the price at which they will trade. Buyers want to pay as little as possible for their bitcoin. Conversely, sellers want to sell bitcoin as expensively as possible. Both must compromise on a certain price before any transaction.

As we have already said above, the price of Bitcoin, whatever the market, is simply the most recent price accepted by a buyer and a seller.
So let's take a closer look at how buyers and sellers on a platform reach an agreement.

The order book

The trading interface for crypto exchange platforms standard includes what is called the “order book”. This is in fact the page for displaying market information relating to the execution of buy and sell orders.
On the buy side, you will find all the standing offers to buy Bitcoin at a certain price, also called “bids.” On the sell side, you will find all the offers to sell Bitcoin at a certain price, also called “asks.”

Recent transactions are often displayed too, in list and/or graph form.

Here is an example of a real-time order book from Binance :

At the bottom right you see the trading history. trading history, which shows how many coins were traded and at what price. The most recent trade will be the one that sets the last price. The latter price reflects the current valuation of Bitcoin on the stock market – in other words, the current price of Bitcoin. This will only change if more exchanges occur.

On the left side, the latest offers from buyers and sellers are listed. This indicates the price the seller is asking for their coin and the number of coins they are willing to sell. Binance 's order book is one of the most comprehensive. That's why we chose this platform as an example.

In the box below, you can place your orders by indicating the sale or purchase price you want. The square at the bottom is what we call an order book.

Makers and takers make the market

As we have just seen, on the platforms, there are purchase orders and sale orders. These orders are divided into two main categories called "taker orders" and "maker orders".

In fact, they are the ones who will create the law of supply and demand behind the price of bitcoin and other cryptocurrencies;

It is the makers who come to fill the order book. This is the list of buy/sell orders waiting to find a buyer or seller. This is where a trader indicates their sale or purchase price. Remember that the price indicated by the trader may be above or below the price displayed on the platform.

Thus, his order will be carried out in deferred time (not at time t) when a buyer or seller takes at his price. This is for a "maker". He makes the market by indicating his price for a deferred purchase or sale.

Conversely, the taker buys from him at the market price. His order is processed immediately. The taker buys at the current price. Basically, he will buy or sell in a price that was indicated by a maker.

You therefore understand that a maker will impose its purchase or sale price somewhere.

How do buyers calculate the price?

Let's say that aggregate buyers, convinced that the price will reach $10 by Friday, play the role of takers. Buyers think they will profit by purchasing less than $000. This makes them more likely to pay the spread to buy all the coins offered at $10 – they expect to make $000 minus the $9 spread. Once buyers have purchased all the coins offered at $400, the next best demand becomes coins offered at $600 – and after that, coins offered at $50, etc., are at the top of the list demands.

If buying is aggressive, sellers quickly realize this and start raising their asking prices. This continues until the buying pressure is exhausted, at which point the process will reverse. Over time, these impulses cause prices to rise or fall.

This is what creates the fluctuation or volatility of Bitcoin. Again, this is actually the process inherent in the law of supply and demand.

—>Read the article to understand the law of supply and demand in crypto.

The price of bitcoin on exchange platforms

Of course, price discovery occurs on all Bitcoin trading platforms (not just Binance ). The process described above takes place, more or less continuously, on the hundreds of Bitcoin exchanges worldwide.

Understand that in absolute terms, there is no official Bitcoin price, with each exchange having a different price for bitcoin.

The arbitrage process, which keeps prices more or less synchronized across exchanges, is a trading strategy that takes advantage of price differences between various trading platforms. For example, if Bitcoin is cheap on Binance but not on Coinbase , traders (or their bots) will make low-risk profits by trading between the two. The effects of arbitrage are what keep prices aligned across all markets.

The main exchange platforms influence the price of bitcoin

Finally, it's worth noting the impact of leading exchanges on the market. Those with the highest trading volumes (i.e., the largest number of coins traded) influence the price. They are considered to have the most "official" price. For example, if the price of Bitcoin skyrockets on a major exchange like Bitfinex, Binance, or Bitstamp, this will be reflected on others. And, especially when several major exchanges experience this surge simultaneously, prices on all other global exchanges will almost certainly be higher. These larger platforms alone influence the price of Bitcoin.

The reason for this large trading phenomenon is simply that most traders pay close attention to the major exchange rates. Traders expect prices on major exchanges to flow through to minor exchanges due to the effects of arbitrage and the belief that other traders will act accordingly.

This major currency effect occurs even in exchanges that use different currencies. For example, if bitcoins traded in a high-volume country, such as Japan, where the price is in JPY, start to fall below the average international price, this will likely weigh on prices in USD, EUR and other currencies. other markets.

Final word on the price of bitcoin

Now you know, roughly, what determines the price and course of a bitcoin. We do not here show the underlying emotion in the prices set by buyers and sellers. We will also talk about the effect of whales on the price of bitcoin. That is to say the most important bitcoin portfolios which can change the price with a simple decision.

In fact, a prevailing theory suggests that the current fall in Bitcoin is due to a strategy employed by Bitcoin whales …

Note: No financial advice is given in this or any other article on zonebitcoin. This is information of which you are the sole judge and master. Be responsible with your investments and only invest as much as you are willing to lose.

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