How is the price of Bitcoin and other cryptocurrencies calculated?
Many people wonder how the price of Bitcoin is calculated, but it’s important to remember that it works no different than it would with other currencies or objects. Let’s first look at how the prices of most things are derived – we can use oranges as an example. What is the price of an orange?
Well, it depends. As a starting point, one would derive the price of an orange based on two things: how much someone is trying to sell it for, and how much another person is trying to buy it for. If John wants to sell it for USD2.50 and Sarah is only prepared to pay USD2.00, there is no deal. But if they agree on a price that works for both, let’s say USD2.25, then the transaction will happen. If it’s winter there might be more people wanting to buy oranges, so the price will go up. Or if there is a drought the supply of oranges will become less, so more people are trying to buy less oranges, which can also drive the price up.
Bitcoin and other currencies are a bit different from oranges in that they are what is called ‘homogeneous’ – one dollar is identical to another dollar, just as one Bitcoin is the same as another. Oranges on the other hand can vary in size and quality. All this means is that it’s easier to come up with a price of a currency or Bitcoin. Once again, just what a buyer and seller will agree on.
Many people might not realise that other currencies work exactly the same – if you are holding a coin or note of your own local currency in your hand, at any given point in time there are millions of people buying and selling your local currency, so while you might observe it as stable, it’s value actually continuously changes. When you want to exchange it for another currency at a currency desk, let’s say for USD, one day you pay 10 local currency to a dollar, the next day maybe 11 or 9. Bitcoin works exactly the same way – you can just think of it as a currency other than the one you are used to.