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Cryptocurrency Prices

cryptocurrency prices

Where do crypto prices come from?

To try and frame risk, whether you are a short-term trader or a longer-term investor, or hodler, it is important to understand what influences prices.

Technical analysis is a strategy to examine what impacts the short-term volatility of cryptocurrency assets by looking at influences which can impact over months and years.

This type of analysis begins with knowing what the price is and where it comes from, as a starting point.

What and Where

As it is the best known, let’s use bitcoin as our example. The price is based on the perceived value in relation to an existing currency which is then established by the activities of buyers and sellers.

The relationship between two assets, such as bitcoin and the dollar, is called a Trading Pair, normally shown in the three letter ticker system as BTC/USD.

Value is subjective and the common view is that the price is based on the assets future potential to fulfil a function. In terms of bitcoin, the common perception is that it is undervalued based on its potential as a new money, but there will always be a difference of opinion over what the right value should be at any time.

Whatever an individual’s belief, there come times when the opinions of buyers and sellers coincide. When the highest price that a buyer is willing to pay is matched by the lowest price a seller is willing to sell at, an exchange takes place.

This is known as the Spot Price, because it is the price which buyers and sellers will accept on the spot.

Other price mechanisms emerge as an asset market matures; derivatives allow speculation on a future price point. So-called Futures can allow traders to invest not directly in the asset, but in funds that track its prices.

Price Discovery and Exchanges

Price discovery is the process of identifying a fair value for an asset. Everyone involved in the market will have their own idea, based on analysis and watching the behaviour of others, on what the true price is.

Basically, price is discovered by market participants and trading facilitated by exchanges.

Exchanges match buyers and sellers who give their opinion about a price by trading. These continuous trades generate the asset price. This is where that price comes from; an agreement on perceived value at a specific time.

Each exchange platform functions independently, so there is no single source of price truth outside of exchanges. There are aggregators, which pull in prices from the largest exchanges and use a weighted average to produce a broad price value. There will be wide differences between aggregator figures and those of individual exchanges.

Prices on different exchanges won’t differ greatly when market conditions are the same, and as cryptocurrencies mature, the prices are becoming more efficient.

Exchange Order Book

An exchange will share the Bid; the price a buyer is prepared to buy an asset at, and the volume.

Alongside the list of Bids will be an order book of Sellers, giving detail of sell offers, including the price and amount Sellers are willing to exchange. This is known as an Ask.

When a Bid and an Ask match, a transaction takes place, establishing the price.

Analysis of the order book will indicate if it is balanced toward selling or buying. However, you should note that the order book represents limit orders; trades requested at specific prices for specific amounts. Assets could also be traded through market orders, where the buyer or seller is happy to take the best available price at that point.

Exchange Depth Chart

It can be hard to read the order book, as it is fluid. An easier way to interpret what the order book is saying is with a depth chart.

Roughly V shaped, the depth chart is made of two sloping triangles with buyers on one side and the highest Bid meeting lowest Ask of all the prospective sellers on the other side.

This can make it easier to find resistance levels or sell walls, where an increasing price may struggle to overcome a large number of Asks at a given price.

Both the order book and depth chart are dynamic, as sentiment is constantly changing. The value of what you see is only as good as the stability of that sentiment. That means you should, when digesting charts, also watch the information that charts react to, so you can see which way sentiment may go.

Executed Trades

Once the buyer and seller are happy, a trade is executed. This defines the price at that point in time.

While historic trades, usually available as part of a trading display, can give valuable retrospective information, the most fundamental representation is a price chart.

A price chart gives you a simple visual clue to price history, which could allow you to spot patterns to base future price predictions on.

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