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I've been talking with my friend about this, and apparently, it seems that Bitcoins have some sort of value that is given to them.

On some websites like bitstamp, there are graphs and charts that indicate what the value is of a bitcoin in USD.

My question is, what/who determines a bitcoin's value, and what factors are involved when determining the pricing? Some things I've heard are that Bitcoins are completely seperate from other currencies and do not rely on them for value, but there must be some way it's priced.

marked as duplicate by Stéphane Gimenez, Nick ODell, o0'., cdecker, eMansipater Apr 17 '13 at 4:27

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  • 3
    As with anything, the price is what people are willing to pay. – dchapes Apr 10 '13 at 4:09

Fiat money is money that has no entity backing it other than the issuer, usually a government. When the United States dollar finally disconnected from the gold standard in 1971 it became a fiat currency. Basically the USA declared, "The dollar has value because we are 'Murica" and the world said, "OK". In actuality, the US dollar has no intrinsic value other than the fact it is issued by the United States. Most modern currencies are fiat money.

Bitcoin follows the same principle, in that its value is determined by perception. Instead of the trust of some government entity being evaluated to determine the value of Bitcoin, other factors (the technology, widespread acceptance, understanding of e-money, etc.) are taken into consideration. When magazines and online entities write intriguing articles about Bitcoin, people take interest in it, the demand goes up and so does its value v. government-back currencies. Likewise when Mt. Gox is DDoSed, a bitcoin service shutters, or $250,000 worth of BTC is stolen, people get nervous, demand drops, and so does BTC's value.

  • In addition to the market dynamics you describe, the miners have to consider the return on their investment in hardware and electricity. When the mining activity drops due to a drop in BTC value then that too will impact upon the market value due to the impact on the supply side. – CyberFonic Dec 6 '17 at 3:05

The raw demand for bitcoins really depends on the velocity of the currency. With most of the value of bitcoin currently attributed to speculation, velocity is not high enough to cause transactional demand to be all that significant. Perhaps transactional demand represents only a few percent of the current spot market rates.

So essentially Bitcoin needs to gain traction as a payments network before a selloff begins, otherwise whenever the top is reached and a rush to the exits by speculators begins, the outcome will be dramatic.

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