We read about prices of cryptocurrencies going up and down every day. But what does the market price mean, why is it always changing, and why is it not consistent?
Cryptocurrencies, similarly to stock and commodities markets, trade based on public market actions. Intrinsically, cryptocurrencies have no value, similar to how a dollar bill is intrinsically worth only the material it is printed on. By decree (fiat), dollars are set as a currency. The SEC. has made various rulings on cryptocurrencies, notably declaring Bitcoin and Ethereum as commodities, similar to trading corn and oil. However, the SEC is now suing Ripple for treating XRP the same way. Since XRP is issued, not mined, the SEC believes that XRP is an unlicensed security. Essentially, the SEC is saying that XRP trades like a share of a company and not as its own product.
Ok, great, but what about Monero?
Monero is mined in a proof-of-work algorithm similar to Bitcoin and Ethereum. However, the hashing algorithm that is used is changed frequently (roughly every 6 months) to combat ASIC development and allow for people to mine Monero using ordinary CPUs and GPUs. Monero is issued as rewards for mining similar to Bitcoin and Ethereum, and thus will likely continue as a commodity.
Ok, Monero is safe and normal like Bitcoin, what do the numbers mean?
When you see a price, usually what is quoted is the midpoint between the Bid and the Ask prices. The Bid price is the current highest limit order offer for a cryptocurrency on the exchange. Conversely, the Ask is the lowest limit order sell offer that is available on the exchange.
Let's take an example. Say the price for Monero is $155. If you go to trade or open advanced price charts, you might see Bid $154 and Ask $156. This means that on the exchange, or whichever a site is receiving the data from, is reporting that the highest current offer to buy any amount of Monero is $154 and the lowest offer to sell any amount of Monero is $156. These two groups, buyers and sellers, must meet at the same price to execute a trade. Right now, the system is estimating that is at $155, halfway between the Bid and the Ask.
As orders happen, the two prices change. When there are more people trying to sell, then the price tends to go down as more people will compete to get a fair price quickly. This means that as the best offers are sold, then the next best offers are for less. Note that the total number of buys and sells stays the same, as every buy came from a sell. When you see the price going down, it means that people want out now and are willing to take a small loss to ensure that happens. When the price is going up, it means that hodlers are not keen on selling and people are offering more and more for the next sale.
Note, however, that this is all for limit orders. This is an order where you specify the amount of something you want to sell and the price you want to sell it for. The system will then wait for that offer or better. For example, you might set your limit buy order to 1 Monero for $140. Then, the system will put $140 of your money on hold. If the price comes down, the system will buy it. If the price falls fast, say it updates and goes from $141 to $135, then it usually buys near $135, but it will never buy for more than $140. The sell order works the same way but in reverse. Now, you are saying what is the minimum price you would want to sell at, and how many you want to sell. Once you place these orders, you wait until it meets. Of course, the conditions you specify may never happen and you risk missing out because the price dropped to $140.1 and you specified $140 and not a penny more.
How then do we avoid missing a sale? You can place a market order. Typically, exchanges will require you to have 1-5% extra liquid cash available than what you see listed for the market price. This is not including the commission fees, which are often 0.3% or $0.5 depending on your exchange. This is because there can be delays in getting the order executed, resulting in large price swings being possible. Sometimes, you can get lucky and save a few percent, but sometimes it costs you a little extra. However, you are almost guaranteed to get an order done.
In addition, there are many exchanges including Binance, Coinbase, and Kraken. These exchanges independently facilitate the trade of various cryptocurrencies. Due to this, the price is not always the same between exchanges. Of course, you might ask, doesn't that mean you could buy something on the cheaper exchange and sell it on the more expensive exchange to make a profit? Yes, that is called arbitrage when you are simultaneously buying and selling what should be the exact same thing at different rates. An example is that if Bitcoin is $34,000 on Coinbase and $33,000 on Kraken, then if you bought a bitcoin Kraken, transferred it to Coinbase, and then sold for tether you would lock in $1000 minus commissions and mining fees, which might be $300. This means you net $700, assuming the prices stayed exactly the same. But of course, prices already are changing. These phenomena tend to resolve quickly and results in prices equalizing as people will do just that and it will rebalance the buy/sell pressure across participating exchanges. In addition, you will always lose a nonzero amount on commissions and mining fees, and the window of opportunity usually rapidly closes. If that $1,000 difference is open for 10 minutes but it takes 15 minutes to transfer, then the sale will be too late to make money.
