What does bitcoin’s price represent & where does it come from?

Staying focused on bitcoin as our example, price is a measure of the perceived value of bitcoin in relation to an existing currency (such as the Euro) and is established from the interactions of buyers and sellers. 

The price relationship between two assets is called a 
Trading Pair such as bitcoin and the Euro which is 
shown using three letter ticker symbols:  BTC/EUR 

Perceived value is entirely subjective, but the most common view is that bitcoin’s value comes from its potential to fulfil the function of a new type of internet money i.e a store of value and a medium of exchange.

Buyers’ perception is that bitcoin’s price (as valued in Euros) will rise, that it is undervalued in relation to its future potential as a new money, but opinion will vary as to what the right price is to buy at a specific point in time. 

Sellers already hold bitcoin but are willing to sell them, feeling that the relative Euro price is more likely to decline in the short term or there are better relative opportunities for which they want to release their capital; each seller will hold a different opinion, as to what the right price is to sell at.

Where the opinion of these two groups – buyers and sellers – meet, a Euro equivalent price is established – the highest price that a Buyer is willing to pay, is matched with the lowest price a Seller is willing to sell at, and an exchange takes place.

You’ll see price described as the Spot Price because it represents the price that buyers and sellers are willing to accept on the spot i.e there and then.

As markets for an asset mature, other price mechanisms emerge, known as Derivatives which enable speculation on the price at some point in the future.

So called Futures are a key part of price discovery and the introduction of bitcoin futures in December 2017 is considered as a key milestone, and prerequisite for other bitcoin related financial products such as an Exchange Traded Fund (ETF), giving investors the opportunity to invest in a fund that simply tracks bitcoin’s price, but without actually owning any.