While many people follow Bitcoin’s price, not everyone knows exactly how this price is determined. Bitcoin is unlike traditional assets such as stocks or commodities, so there are some surprising differences in the way its price is calculated.
What the term “Bitcoin price” really means
As Bitcoin is a decentralized asset that trades on hundreds of exchanges and between countless individuals around the world, there is, in fact, no singular Bitcoin price. Each exchange has its own price for Bitcoin, although these prices are usually quite similar.
When people talk about the price on a certain exchange, they mean the price of the last transaction made on that specific exchange. Once a new trade is conducted, the price will be updated accordingly.
Here's a quick rundown on how price is determined on a single exchange.
Price Discovery in Action
Price discovery describes the process by which buyers and sellers meet on a crypto exchange (or elsewhere) to reach agreement on the price at which they’ll trade. Buyers want to pay as little as possible for their Bitcoin. Sellers want to sell Bitcoin for as much as possible. Both must compromise upon a certain price before any trading can occur.
The Order Book
The trading interface on any standard crypto exchange features what’s known as the “order book.” It’s not a real book of course—rather the display page for market information that relates to the execution of buy and sell orders.
On the buy side of the book are listed all the standing offers to buy Bitcoin at a certain price—also known as “bids.” On the sell side are all the offers to sell Bitcoin at a certain price—also known as “asks.”
Makers and Takers
What really driver the price up or down is the side that’s more aggressive in “crossing the spread.” The spread is simply the difference between the best bid and best ask price.
If buying is aggressive, sellers soon realize it and start raising the prices of their asks. This continues until buying pressure is exhausted, at which point the process will reverse. Over time, these impulses drive the price up or down.
The reason for this leading exchange(s) phenomenon is simply that most traders pay close attention to major exchange prices. Traders have the expectation that prices on major exchanges will filter through to minor exchanges due to the effect of arbitrage effects and the belief that others traders will act accordingly.
Finally, it’s worth noting the effect of market-leading exchanges. Those with the highest volumes (i.e., the highest number of coins traded) tend to be considered as having the more “official” price.
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