Who Sets Bitcoin's Price?
Bitcoin Is Known as a Volatile Asset—Here's How It's Priced
Bitcoin, the popular cryptocurrency, is neither backed by any banks or governments nor is it recognized as legal currency. However, private parties are able to use Bitcoin for transactions if agreed upon, and it is also purchased and traded on exchanges by investors. Investors are able to purchase bitcoins through cryptocurrency exchanges. Please note, however, that the legality of bitcoin varies by country, with some countries placing an absolute ban on its use. The U.S. Library of Congress publishes a detailed report on its regulatory status around the world.
Bitcoin is a volatile investment when considering the basis of the currency's price. When the currency was first launched in 2009, it had no official price because it was not being sold. However, when the first exchanges began to appear, a price developed.
Bitcoin's price at first was small—just a few cents, and it wasn't even being tracked like stocks are in the market. It wasn’t until 2013 when Bitcoin began to take off. In October 2013, Bitcoin was priced at $123.50. It started climbing rapidly, reaching over $140 in April, and topped $1,000 by December of that same year.
The high value of Bitcoin continues to attract the attention of many speculators.
Factors That Influence Bitcoin's Price
Bitcoin’s price isn’t set by anyone in particular. It’s set by the market—this makes pricing the currency more complex because prices will vary by exchange. As an example, you could look up the price of Bitcoin on the internet, and you might find two different prices. If you used Coindesk.com, you'd see that the price as of June 1, 2020, was $9,710.72. However, Winkdex.com lists Bitcoin's price as $9,402.79, as of June 1, 2020.
You aren't able to trade Bitcoin via these index sites—all they’re doing is aggregating price information.
Part of the reason for all the different values is where the data comes from. Bitcoin is never traded in one place. Instead, it is traded on multiple exchanges, all of which set their own average prices, based on the trades being made by the exchanges at a given time.
Indexes gather together prices from several exchanges and average them out, but not all of the indexes use the same exchanges for their data. If you want to buy and sell Bitcoin, you have to choose a particular exchange, which will have its average price. The price of Bitcoin fluctuates at any given moment, depending on which exchange the information comes from.
Liquidity and Price of Bitcoin
The price of Bitcoin is very volatile, partly due to the liquidity (the ability to quickly buy and sell) of the currency. The amount of bitcoins flowing through the market at any point in time gives investors the ability to enter and exit positions quickly.
If people are trading a high number of a particular asset, it becomes harder for one person or event to shift that price in any single direction. Think of it as a stream of water—you can redirect a small stream by putting down a few planks of wood. But if you wanted to redirect the Mississippi, you’d have a much harder time, because there’s simply too much of it.
With fiat currencies like the U.S. dollar and the British pound, people trade huge volumes every day. With Bitcoin, trading volumes are small in relation to the rest of the assets being traded daily—which means that single events can make a bigger difference.
Events That Can Change Bitcoin’s Price
The Bitcoin market is influenced by many events. If it is leaked that a large government is uncertain about how to regulate Bitcoin—as occurred in China—the price can fall.
There are also other factors affecting Bitcoin prices. There are only so many bitcoins available, and they are produced at a predictable rate. The ownership of those bitcoins is unevenly distributed—some Bitcoin giants have vast hoards of the currency in their wallets (digital storage). That, combined with liquidity, makes it easy for people to manipulate the market.
In some cases, the price can be driven down by large traders who sell bitcoins off in high volume. One such trader, nicknamed BearWhale, temporarily crashed the market by selling off a large holding of Bitcoin below market value.
When it comes to your bitcoin trading strategy, you should exercise caution. Bitcoin is an extremely high-risk asset, and even the most experienced traders can lose money in a highly unpredictable, volatile market. This is not a reliable method for boosting your pension’s earnings potential.