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How is the Price of Bitcoin Determined?

How is the Price of Bitcoin Determined?

How often do you check Bitcoin’s price? If you’re like most crypto investors, you probably answered at least once a day. But do you know what determines the price of Bitcoin or other digital tokens? While Bitcoin bears similarities with stocks and commodities, it’s worth noting that there are differences in how its price is calculated.

Why the Bitcoin Price is constantly changing

When people talk about Bitcoin’s price, they usually refer to the USD price on a major cryptocurrency exchange. In rarer cases, they might refer to a composite price generated by averaging the prices of Bitcoin in various exchanges.

But you should understand that the price of Bitcoin on a specific exchange only refers to the price of the last transaction. This means that if the last trade executed on the exchange was closed at $3,500, then that exchange lists the price of Bitcoin at $3,500.

Of course, Bitcoin trades on different exchanges, which means its price is constantly changing. When looking at two exchanges at once, you’ll probably see two difference Bitcoin prices. The difference may be small, but it’s interesting to dig deeper to see what goes on behind the scenes.

Price Discovery

You’ve probably heard that the price of Bitcoin and other cryptocurrencies is largely determined by supply and demand. Price discovery is the process through which buyers and sellers agree on the price of a particular coin to close a transaction. This action is evident in the Qprofit System Review, in which buyers want to purchase coins for as little money as possible and they get matched with sellers who agree on their price points.

Makers and Takers

Many people describe Bitcoin’s price movements as events caused by having more buyers than sellers, or vice versa. But this isn’t necessarily true. A better explanation of these movements is the actions performed by the market’s makers and takers.

Notable shifts in price are caused when one side shows more aggression in crossing the spread. In case you didn’t know, the spread is the difference between the best bid and the best ask price. For example, if the best bid is $3,400 and the best ask is $3,450, then the spread is $50.

If the buyer is more motivated to cross the spread of $50, this side becomes the taker because it’s accepting the offer of the maker to execute the trade immediately. Market makershave a significant role in driving prices up or down. If buyers feel convinced that they can profit by buying at $3,450 even after paying the spread of $50, they’ll be willing to invest their money.

But as soon as sellers notice the increase in buyer’s willingness to purchase at their asking price, they will increase their prices to gain profits as well. This cycle continues until the buying pressure comes to a halt.

The never-ending transactions between makers and takers are the real driving forces behind Bitcoin’s price. Of course, other factors influence the price of a coin such as the market cap and circulating supply. But it’s the agreement between buyers and sellers that ultimately dictate which direction prices will head to.

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