Understand how cryptocurrency price is determined

The US Dollar price we see listed for major cryptocurrencies is an average amount obtained from major crypto exchanges using their API.

For example, CoinMarketCap (CMC) has “Markets” tab that lists the traded pairs which make up a coin’s current price. Here’s a sample of Bitcoin prices at CMC:

As you can see, CMC sorts the amounts by descending 24 hour volume.

This is logical, because the higher the volume the more relevant the price action.

Volume Weighed Price

Take, for example, an obscure exchange where only a few thousand U$ were traded in the past 24 hours at an outlier price of U$ 15000 per Bitcoin. Were these smaller exchanges to have the same weight as the large ones, the price average would be artificially skewed towards U$ 15000.

Therefore, the public price we see is formed through a weighed average (at least that’s how the good price trackers do it). This system uses a coefficient which is the volume from each exchange divided by the total 24 hour volume. Each reported price is multiplied by this coefficient, so its price data takes on a weight proportional to how much volume was exchanged at that price.

Stablecoins

Notice that US Dollar is not listed for several of the top markets on the above screen capture.

In fact, Bitfinex is the first exchange to report a U$ price in that listing. Note how the top two use USDT instead of USD. This is a controversial practice, given that Tether’s are not the same thing as US Dollars. We’ve discussed this in a previous post.

Also note that there’s a complex relationship between FOREX rates and cryptocurrency rates.

For instance, some of the highest volumes are negotiated in Japan, where the volume is listed in Yen and not in US Dollar. How come, then, the right hand side column reports a U$ volume and not Yen?

Obviously the JPY rate is converted to USD in real time before reporting. But this is also not very accurate because it injects a three way variable into the mix.

The US Dollar will oscillate against the Japanese Yen, which in turn oscillates against Bitcoin, inserting a complex and volatile FOREX/Bitcoin/USD relationship into the mix.

For example, the quotation of JPY itself against the USD is a different weighed average taken from FOREX data sources. The propagation of these variations inserts several layers of volatility into the final reported price.

Conclusion

As you can see, the formation of the current Bitcoin price is a complex process that involves hundreds of markets, currencies, averages and even the so called stable cryptocurrencies like Tether.

Crypto investors get used to the volatility by adapting to the nature of Bitcoin pricing. 10 to 20% fluctuations in a matter of minutes are not uncommon in crypto. Which, if you think about it, could be the result of all the variables we’ve just mentioned.

As with everything else in the world of cryptocurrencies, Bitcoin pricing is a different universe with its own rules and idiosyncrasies!

Links

How is the price of Bitcoin and other cryptocurrencies calculated?

What Determines the Price of 1 Bitcoin?

Bitcoin FAQ [See question about price formation.]

What is the formula to calculate a price of a cryptocurrency?

How do I calculate the value of some amount of bitcoins in my native currency?

Bitcoin price mathematical model (bitcoin formula)

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