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.
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