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I'm curious what the implications are that all these exchanges go offline whenever there is a huge spike in bitcoin.

That being said, anyone care to elaborate how the price of bitcoin is determined? I mean it's easy when there is a large central bank monitoring this figure. However, how exactly does it work for bitcoin? What makes it worth the $15K value when there is no "goods" to back it up. Are there anyone here buying bitcoin as an investment?




As others said, its determined by what people will pay for it. If you go to an exchange like GDAX (or any stock exchange), you can look at what is called the "order book". If you are a trader, you can act as either a:

- "Market Maker" - By placing an entry in the order book, which says something like: "I have up to 100 Bitcoin I'm willing to sell at $15,000.01 a piece", or "I'm willing to buy up to 100 bitcoin at 14,999.99 a piece".

- "Market Taker" - You can do this by looking at the book and saying: "I will take that deal". You can also do a "market order", saying: "I want to buy 100 BTC at market price", in which case, the exchange will match you with as many sellers as it takes to fulfill your order of 100 BTC, working from the lowest offered price on up.

The price is determined by either whatever the last trade executed at, or a weighted average of the buy side and sell side of the order book. If you hear someone talking about the spread, that is the difference between the highest buy price offered on the book, and the lowest sell price offered on the book. (2 cents in my above fictitious example).

The exchanges make their money by running the order book, matching makers and takers, and charging a small fee for the transaction. (On GDAX for example, market makers get charged no fee, market takers get charged some fraction of a %). The exchanges make money on the volume of trades going through them.

It can get a bit more complicated, but I hope that gives you an idea!


Is there a term for those who take advantage of the spread to make their money, essentially placing buy orders and then turning around and placing sell orders? Seems like there must be people making money off those who only "Take" deals and never "Make" them.


Those are just called "market makers". As a market maker you might be exposed to the risk of always ending up on the wrong side of the market over a longer time. For example if BTC is generally moving up, market makers might eventually have sold all their BTC and end up with USD. Sophisticated market makers will thus try to maintain a neutral position to avoid that risk. Some exchanges will even offer market makers a fee rebate to encourage parties to become market makers.


If they're just doing so by essentially flipping between bid and ask prices they may also be called scalpers.

https://www.investopedia.com/terms/s/scalpers.asp


That is what a Market Maker is.


Exactly. GDAX and other exchanges charge less or no fees to the market makers to increase liquidity in the market. (Basically lessen the spread and increase volume on the order book).

From the exhanges POV this is useful because more orders = more money for then.

From the market traders POV (the taker) this is useful because a lower spread and more volume means there is less chance of buying something they can't later sell.

For the market maker, they make their money on volatility (aka the movement if the price). If they think the price is going up, they will offer to buy at a price higher than the current highest buy offer. This reduces the spread and increases the odds of someone taking their offer. They will then later sell those coins, and make a small profit on the movement.

If they think the price is going down, they will place a sell order cheaper than the lowest sell, and then buy back later, making small profit whole keeping the same amount of coin / stock / whatever.

Basically a "market-making" trader is less in it for long-term, and more interested in making money on the movement.

Aside: You may have also heard of "short selling". This is when a market maker is betting the price is going to go down, but doesn't have anything to sell. In a short sale, they will borrow the stock/coin from someone else (such as the exhange or their broker), and sell it, promising to buy it back later to repay the loan of said stock / coin. Easy way to bet on perfornance of an asset you don't owb, but dangerous since if you are wrong and price goes up, the person who loaned it to you will want you to repay it back sooner rather than later, costing you money!


What makes it worth 15k is that people will pay that much for it. The price is determined by buyers and sellers, trading with each other on markets called exchanges.


I get the "market" determines the price but I guess I'm confused with who is agreeing to the value? Is there a small amount of big players that are playing with the price? Or is there a general consensus that the price is $15K. And wouldn't there have to be people that we willing to pay this price? What prevents the exchanges from colluding and raising the price artificially?


Overly simplified explanation: You have to have a buyer willing to purchase at that price. Lets say the exchanges set the price at 100k when 3 minutes ago it was 15k. No one would buy.

A lot of the market movement is caused by people setting fixed prices on their transactions. Eg: Sell 5 BTC at X Or buy 5 BTC at Y. If X or Y is never reached the transaction never takes place.

Generally the exchanges just connect a buyer to a seller. You are not buying the exchanges coins but rather the coins of another individual/trader. The exchanges are just middle men facilitating the sale.

The exchanges make money on a per transaction basis on fees. If the market grinds to a halt because there are no transactions the exchanges make no money.

Now there are many possible reasons for the recent spike, some malignant such as potential pump n dump scheme or artificial inflation due to the upcoming futures exchanges and the desire to profit from shorting and some benign such as all the media attention and fear of missing out or just genuine belief in the potential of BTC as a currency or asset.

No idea which reason is accurate, could be all of them or none.


Hey, I hope you saw my above price about how the market works.

So to give you a little more info: 1) Yes, there are big players (aka "whales"), and the rest of the "small fish", all playing in the same pond. The interesting thing about cryptos is that the are more "money-like" than "stock-like" when it comes to trading. Meaning just like money, where I can buy a fraction of a $, I can also buy a fraction of a bitcoin. So there are a lot of smaller players who will buy, say .01 BTC for $150 right now.

But while there is a general consensus that bitcoin is $15k by virtue of people paying that much for it, the "whales" (people with a lot of money or coins), can cause issues because they can put a lot of volume on or take a lot of volume off the order book at once. This happened to Ether this year, dumping the price for a few minutes from >$300 down to about 10 cents for a few minutes! https://blog.gdax.com/eth-usd-trading-update-5d8142b5bdc1

In fact, there is some speculation that a lot of the rise right now is from Wall St. / big firms buying up a lot of coin, as futures trading on Bitcoin is coming in the coming weeks! (But I don't know enough to comment on that theory)

As far as preventing exchanges themselves from colluding... it would be difficult but not impossible, because again the price on the exchanges comes from the traders, not the exchanges themselves. (Theoretically it is possible that an exchange could do a bunch of "wash trading" / make up a bunch of fake trade volume to make demand look higher than it was, but given that there are a number of exchanges in a number of different countries, coordination there might be difficult)


>Is there a small amount of big players that are playing with the price?

We don't really know.

>Or is there a general consensus that the price is $15K. And wouldn't there have to be people that we willing to pay this price? What prevents the exchanges from colluding and raising the price artificially?

Well the exchanges could be running buy-bots but I think the more likely collusion is going to be big-players selling to themselves, if a big player is filling up both sides of the order book they can make it look like there is a lot of activity and drive the price up that way. Now is this that or is it organic? I'm not sure we have a good way to tell.


Naïve question here: since wallet addresses are fixed, couldn't you detect transaction activity unusually repetitive between a few wallets? Couldn't some clever learning algo detect anomalies such as what you hypothesized could be going on?


Probably. Could be an interesting data science project. One thing I'm not sure about is how easy it is to make new wallet addresses. Do you know?


A Bitcoin address is just the hash of a public key, so generating new addresses is extremely cheap (on the order of microseconds) and doesn't require interacting with the blockchain at all.


People place orders saying they will buy it at x price and these are matched with sellers. I recommend checking out poloniex to understand how a crypto exchange works. Coinbase isn't actually an exchange rather they have to buy Bitcoin from elsewhere and then sell it directly to you and that's part of why the price on coinbse is always higher than on real exchanges


This is true. It also helps that their is a finite supply, so if demand remains constant, the value theoretically should rise over time.


Look at it this way: these services are like banks, but their traffic is more like a news site. It's literally the most challenging aspects of both worlds.


simplistically, the exchange manages an "order book", which records the amount each person wants to buy or sell, the price at which they are willing to trade, and the time the order is received. if there is enough "buy" volume at a given price to fill a given "sell" volume, then a trade happens. the price of the latest trade is the "market" price. this happens for every order that has a volume and price matched "other side" of the trade.

there are many orders that are above or below the current market price. those wont get cleared until the trades that are closer to market clear, and they may not get cleared at all if the market moves the other direction


Like any traded asset it's just based on the current buy and sell orders, same as with the stock market




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