When you are new to something lots of questions come to your mind. Similarly, cryptocurrency is relatively new to a majority of people in this world. Many of those people want to find answers like how Bitcoin exchange actually works? Or how are Bitcoin exchange rates determined? If you are among those people then don’t worry as today, in this guide, we will tell you about the working of Bitcoin exchange in a language as simple as possible.
You must be familiar with the fact that Bitcoin is a decentralized peer-to-peer payment network. In this network there is no central authority or middlemen, instead, it is fueled by each of its users. This payment system works by each of its user agreeing to a same set of terms. Now let’s come to our main topic; how Bitcoin exchange works? How are Bitcoin exchange rates calculated?
Working with a Bitcoin Exchange
The procedure of Bitcoin exchange can be explained in simple terms as follows:
• Let us suppose that there are two persons who want to sell Bitcoins. Take the last price for which Bitcoins were traded as $200 USD per Bitcoin.
• Now the two persons won’t sell their Bitcoins at $200 USD itself. Let’s assume that one sets the price at $210 USD and the other at $220 USD.
• A person who is looking to buy Bitcoins will look for the lowest price available. Consequently, he will go for the price of $210 USD per Bitcoin.
• If the buyer wants to buy more Bitcoins, he will consistently look for the lowest price available in the current market. As a result, the price of Bitcoin will ultimately increase because, in the end, all the Bitcoins which were placed at a lower price would have been sold. So, there will be no lower-price orders meant for selling.
• If you want to get fiat money (take USD for example) in exchange for a Bitcoin, then you are required to send your Bitcoin to the exchange’s wallet.
• In return, the exchange will credit your exchange Bitcoin account to enable you to trade.
• Now you will just put up an order and buy US Dollars with your Bitcoin. So now your Bitcoin balance will be deducted and USD balance will be increased.
• At last, you can exchange your bank account details to get your earned money.
How is Bitcoin exchange rate determined?
To begin let me ask you another question. Why do you consider dollars as money? You might give me the reply like it is issued by the government or it is accepted by the people worldwide. Some of you might say that it is adopted by the people and nobody said ‘No’ to it when the government declared it as a type of money. This type of money i.e. dollars, in this case, is called as fiat money because nobody is backing up the case that it is a form of money other than the entity which has issued it, which in this case, is the government.
Similarly, Bitcoins have worth because they are effective, helpful and profitable as a sort of money. A Bitcoin has all the qualities of money and now even people have put their trust in it and adopted the new payment system. This can be seen by an increase in the number of people and merchants dealing in Bitcoin. So, what exactly determines a Bitcoins price?
The answer is pretty simple. Just like any other currency, the exchange rate of Bitcoin is dependent on the graph of supply and demand. Whenever there is an increase in demand, the price of a Bitcoin increases and as the demand decreases, the price also falls along with. The price of a Bitcoin is highly volatile as it is still comparatively very little in circulation; thus only a small amount of this currency can bring a huge impact on the market.