How is the price of Bitcoin calculated?
Bitcoin is a decentralized digital currency, so how is the price of such a digital asset calculated? The simple answer would be economics 101- the law of supply and demand.
When Bitcoin came into existence, it had no official price. It was only when Bitcoin began appearing on exchanges and people started trading that a price appeared. The first exchange to list Bitcoin was the now defunct bitcoinmarket.com in March 2010 for $0.003. It was only in Feb of 2011 that Bitcoin hit $1 and has ever since been on a roller coaster ride testing new all-time highs and surviving subsequent crashes.
Now, the price of is heavily dependent on the markets in which it trades. Bitcoin is a global token and as such, it is constantly traded on multiple exchanges across the world. These exchanges set prices depending on various factors such as prices across other exchanges, liquidity available, the buy-sell trends etc. In addition, the Bitcoin market is 24/7 resulting in a Bitcoin price that fluctuates at every instant*.
*Note: We recommend a practice of signing up with as many exchanges as possible to ensure you are able to leverage the best buy & sell opportunities at any instant. Do ensure to research on the exchanges and build sufficient levels of trust before partaking in any trade.
The key contrast when compared to a market like Forex where fiat currencies are traded are that Bitcoin volumes are relatively smaller. This means that even small and sometimes irrelevant events could set the market spinning. The china crackdown on cryptocurrencies, shut down of drug trading website Silkroad, release of Bitcoin futures market in the USA, etc. are prime examples of this.
The biggest factor though when it comes to Bitcoin price is: scarcity. Bitcoin is fixed in its lifetime supply with only 21 million Bitcoin ever to be generated. With 16 million already in circulation and at least 10% attributed to being lost in hard-drives or forgotten passphrases, we are all fighting for a slice of the same proverbial pizza. You can rest-assured that as long as Bitcoin can provide value and is backed by demand, the future is looking good.
While the volatilities mentioned may be appealing to speculators, Bitcoin is an unpredictable and we advice all users to do their research before putting in their hard earned money. Be smart, be prudent and do not invest money you cannot afford to lose.
