Where do these coins gain their value?

Question

I have been mining coins for a long time (started with BTC/LTC years ago, moved to altcoins recently) and have realized I am not clear on the actual source of the value.

Do the exchanges deem the value of these coins? With all of these new alt-coins, do they not actually have a BTC/USD value unless they are added to an exchange?

How do buy/sell orders affect the coin price? If someone bought X amount of , that would cause the value to increase correct? Wouldn't they then just be able to turn around and resell what they just bought plus any they already had for a higher value?

Answer 1

This is really asking about basic trading economics: if I have some new product X, what price does it have? I can set a price and see if anyone buys it. If not, I might lower the price or auction it to see what someone might pay for it. That is the starting value, but it doesn't really mean much as it hasn't been field-tested (so to speak). If others think it is worth more, they will buy more; if others think it is worth less, they will not buy at the current price, so those trying to sell will lower their prices until they can agree on a price.

What you describe is a simple pump and dump operation, which could be done on any sort of traded commodity like stocks or cryptocurrencies (especially altcoins). If you can feign interest in something (in this case, an altcoin) so that the trade price goes up, then you might be able to turn a profit. Note, however, that this is a sort of fraud and can open you up to, at minimum, civil lawsuits.

Doing a "pump and dump" will be easier on small markets, like altcoins, than on larger markets, like Bitcoin and Litecoin, because you have to buy up enough of the coin to start an upward trend that people will notice and buy into. If the market is large, you'd need huge resources in order to make an impact in the market.

Answer 2

If someone bought X amount of, that would cause the value to increase correct? Wouldn't they then just be able to turn around and resell what they just bought plus any they already had for a higher value?

No, because trying to sell the coins would push the value down for the same reason. The further away the price is from its "natural value", the harder it is to push it further away and the easier it is for it to slip back. So if the price is at its natural value, and you push it up, it gets harder and harder (costing you more and more money) to keep pushing it up. When you start to sell, it's very easy to push it down, so you don't make very much money as you return the price back to its natural price.

Worse, if you're trying to do this, to push the price really high, you have to keep buying even though the price is high. Well, that's a pretty dumb thing to do. When you finally do get the price high, everyone can sell at that higher price, not just you.

So not only is the profit less than the cost, but you have to pay the whole cost yourself and you have to let everyone else share in the profit. Many people have attempted this strategy and billions have been lost. That doesn't mean it's impossible to make it work, just that it's not nearly as easy as it sounds.

Answer 3

Beware, young Alice! That rabbit-hole you see is waaaay too deep!! Your seemingly innocent question is indeed very profound and stays at the intersection of history, philosophy and economics.

Whence do anything get its value? According to the Austrian school of economics, there's no such a thing as an "inherent value" of stuff: all value is subjective, we as economic participants "imbue" value onto the things according to both rational and irrational beliefs. Should we be in a desert island, would you rather have 3 gallons of water and a wooden raft or 100 kilograms of pure gold?

Bitcoin itself had imbued value way before there were exchanges set for it. People would give each other coins as a sign of appreciation, a kind of "membership key" into an über-exclusive (and ultra-geek) club or, as in an (in)famous example, in exchange for some pizza.

As for buy/sell orders moving the price of a coin: yes, that does happen when the market for that coin doesn't have too much volume. For instance, with millions of dollars in bitcoins changing hands daily, a single buy/sell order for 1 million USD at any exchange won't move the price up/down more than 5-10%, and that "hiccup" will rapidly correct itself. Try that with, say, Litecoin and the price would go up about 33-50%, and most probably such movement would start a rally where people and automated trading bots enter an irrational frenzy trading, trying to ride the wave.

For a very dramatic and recent example you can check the Protoshares market at cryptsy - look up the graphs for 17-Feb to 18-Feb. And the equally impressive dive (plus its damping up and down the new equilibrium price) about 12 hours later. Unobtanium, Feathercoin and other minor coins have recently experienced similar (induced?) rallies.