This is what determines the price of Bitcoin
Understanding the source of those crazy numbers.
Just like a hiker hoofing up and down across a jagged mountain range, anyone who follows the price of Bitcoin is probably getting pretty tired. From a high of over $19,000 in December of last year to around $10,000 today, the price has been changing so quickly that any news coverage of it is quickly out of date.
As if the wild changes weren’t enough, the price can even vary slightly depending on where you look for it. Here’s what generates those crazy prices, and the small differences between them, that you might see the next time you shop for cryptocurrencies.
It’s about price discovery
The price at any moment is a natural result of the trading that happens on cryptocurrency exchanges in a process called price discovery. For example, consider Coinbase.com— a popular hub, or brokerage, for people who want to buy or sell Bitcoin. If you purchase there, the entity selling you the cryptocurrency is actually Coinbase itself. Coinbase.com has a sister site, called GDAX, which stands for Global Digital Asset Exchange—that’s a marketplace for professional traders and institutions, and that’s where the price discovery happens. The price of the last trade on GDAX is the value of Bitcoin there at the moment, and that’s also the basis for the price you see on Coinbase.com. (Check in the upper left corner here on GDAX to see the last trade.)
“When people say, ‘What’s the price of Bitcoin trading? Or the price of Ether?’ It’s not any company that sets it,” says Adam White, the general manager of GDAX. “That price is discovered on open exchanges through individuals and institutions trading with one other.”
In short, the price of Bitcoin you see on Coinbase.com comes from the trading activity on the GDAX exchange. When someone wants to buy Bitcoin from Coinbase.com, “Coinbase looks to the GDAX marketplace to quote that customer a price,” White says, and then buys it off GDAX if the customer wants it, like a middleman.
Supply and demand
Of course, Coinbase and GDAX aren’t the only games in town: other well-known exchanges include Bitstamp, Poloniex, and Kraken. Then there are aggregators like CoinDesk, which look at what’s happening on multiple exchanges and then average them to get a number.
So that’s why the prices can vary—each exchange might show a slightly different amount, depending on the last trade price, while a place like CoinDesk is looking at multiple sources.
“Bitcoin exchanges are managing an order book,” says Christian Catalini, an assistant professor of technological innovation at the MIT Sloan School of Management. That’s basically “a list of people, at any point in time, willing to buy or sell at different prices.”
“What they do is, they match demand and supply,” he adds. “And that process of matching the two sides of the market is what leads to the price discovery.”
As for Bitcoin’s price recently—far lower than it was in late last year—Catalini says, “the space was ripe for a correction after the craziness of the end of 2017.”