Ever wondered why the price of Bitcoin was the same across basically all exchanges?

I mean, if the people trading on these different exchanges are not the same, then why do they think similarly and bid and ask similar prices?

Is there a central body placing a price on Bitcoin? Or is it really the forces of the market? Let's take a look!

Ok, so first off, here are a few of the things that affect the price of Bitcoin, as well as all other cryptocurrencies.

• The cost of production or bringing of the cryptocurrencies into the market.
• The forces of demand and supply, also known as the market.
• Exchanges where they are traded on
• Trading volume

Those are some of the factors that affect the prices of Cryptocurrencies across the board.

Let's explain the important ones.

THE DEMAND AND SUPPLY OF THE CRYPTOCURRENCY

The simplest law of economics states that the less of a commodity there is in the market, increased in demand for that commodity without a corresponding increase in circulating supply will lead to a rise in price, also known as inflation.

Looking at this simple law can explain why bitcoin is so expensive 

The bitcoin protocol allows for a certain amount of bitcoin to be minted everyday. This means that no matter how powerful the hardware you use is, the number of Bitcoin that will be minted remains the same.

The protocol does this by intensifying the hardness of the cryptographic problem that computers need to solve in order to successfully "mine" a block. So the more powerful the hardware gets, the harder the problems get. (This is why retail mining(mining you do at home) is more or less not profitable)

This fixed supply, coupled with the fact that more people are converted to the bitcoin way everyday(which increases demand) leads to an increase in the price.

Now, it is this increase in the price that sets the market price.

The market price is driven by market leaders. Such leaders are the exchanges that have very high volumes of bitcoin, ranging from the hundreds of thousands of bitcoin. The bids and sells there will determine the price across the board.

So how does the price still remain similar on smaller exchanges?

Well, it happens like this.

Assume Jack is a trader on some obscure exchange with low volume. The exchange has a volume of only 5BTC. But jack has a whole bitcoin to himself.

Jack searched for the price of Bitcoin online. The price he is shown is brought from one of the larger exchanges.

He thinks that's a fair price, so he puts up a sell order for his one Bitcoin at that price on his own small exchange.

The bids and asks continue from there, and that's how the price is set on smaller exchanges.

There are also other factors that affect the price of other cryptocurrencies, apart from bitcoin.

Obviously, the prices of other cryptocurrencies are set by Bitcoin's price by either direct or indirect correlation with the price of bitcoin.

But other factors like circulating supply, whether or not the coin is deflationary or gets burned and other things can affect the price.

That said though, at the end of it all, it's the market that sets the price.

Thanks for reading.