I noticed that there are exchange rates for Bitcoin to other given currencies. How are these rates established?
- You have people that have BTC or currency already in their accounts.
- Those people can claim: "I will buy/sell X amount of Bitcoins for Y amount of currency". If you divide one by the other, you have the exchange rate for that particular transaction.
- If a buy and sell transaction overlap, they are executed and removed from the system.
- After all such transactions are removed, you have a gap between the exchange rate at which people want to buy Bitcoins, and that at which people want to sell Bitcoins.
- Average the closest buy-sell pair of transactions and you have the exchange rate, halfway between those two, or the price of the last trade may be used. In both cases, it's only an estimate of the price that the next trade will take place at.
Most exchanges use the double-auction market system for price discovery. Read more at http://www.investopedia.com/terms/a/auctionmarket.asp
In economics-speak, the auction market converges where supply and demand intersect.
The simple answer is that it is the price at which a seller and a buyer of the currency agreed on a price for it; i.e. the price at which the market clears. The sold currency is, after all, a commodity.
It may help you to strip away any superfluous notions to think of it as a pound of coffee or somesuch. Seller Sally has coffee but wants dollars. Buyer Bob has dollars and wants coffee. Sally will not part with her coffee for less than $4. And Bob will not buy coffee for more than $3 dollars. The market fails to clear at these prices. A new seller, Sam enters the market and is willing to sell his coffee for $3.50. And a new buyer, Bill, enters and is willing to buy coffee for $3.50. Sam and Bill exchange coffee for dollars. This fact is published to the rest of the market participants; who are thereby able to conclude that at some point in the recent past that two participants were able to transact at the price of $3.50. As an entrant to the market, are you guaranteed to find another buyer or seller at that price? No. But it's a useful piece of data.
If you really want to know how this -- and economy in general -- works, you'll have to do a little reading. As a start, I recommend:
Murray Rothbard, Man, Economy, and State
Ludwig von Mises, The Theory of Money and Credit
The MtGox exchange rate for bitcoin to USD is established in a 24/7 free market where bids meet offers to generate a last trade price. The bid/offer spread represents the distance that market participants are willing to buy or sell their bitcoin. This is no different than any other free market or any other free-market exchange-determined commodity price. See; http://mtgoxlive.com/orders
This is an old thread from 2012.. now 8/1/2017 bitcoin price is $4200.. how quickly things change
Coming back to the question - price of bitcoin is determined on exchanges. to understand how the price of bitcoin changes you have to understand how exchanges work. Only a small fraction of all coins in circulation are deposited on exchanges. The main reason of price fluctuation is the relation and volume of demand and supply. There are other factors too, technological advancement which can only be accessible with bitcoin give bitcoin a huge boost.
Bitcoin was the best performing (fastest growing) currency last year
How is the exchange rate for Bitcoin is established based on supply and demand.
Supply Thee rules of Bitcoin, as they currently stand, say that this supply number will slowly go up and hit a limit of 21 million eventually.
Demand There are really two main sources of demand for bitcoins:
- Demand for investment
- Demand for mediating fiat-currency transactions
The actual price calculation can be done as explained here: Model for calculating the exchange rate of Bitcoin