"The value of currencies (including most popular cryptocurrencies) is set by a market. Price rises or falls until the supply and demand of the currency are equalized"

Why exchange rates of national currency are usually stable, where as cryptocurrency like bitcoin and ethereum is highly volatile?

But how does the market calculate the price based on supply and demand that is visible in the cryptocurrency exchange? Can someone give some kind of simple math to understand? For example, I mint some utility coins or cryptocurrency on ethereum from thin air, decide an incentive system. How will the cryptocurrency gain value through trading?


I think you are overthinking this question.

The price of a crypto-coin is whatever price it gets traded for. The value, or "market cap", is the current price of one coin times the number of coins in circulation. (or milli-coins, or ethers, or Satoshis, or whatever the currency's unit of measure is called)

A cryptocurrency exchange is a place where people can post ads. They can say, "I want to sell 5 bitcoins for \$1000 each (or more)." or "I want to buy 4 bitcoins for \$900 each (or less)."

When two ads match up - when someone says "I want to sell 5 bitcoins for \$1000 each (or more)." and someone else says "I want to buy 3 bitcoins for \$1100 each (or less)", then they get matched with each other, and 3 bitcoins are moved, and the price is somewhere between \$3000 and \$3300 (I think it's typical to use the price of whichever person posted their ad first). Then the first person's ad is automatically updated because now he only wants 2 more bitcoins instead of 5.

You can also post an ad saying "I want to buy 5 bitcoins for whatever is the best price right now." and you'll match up to whoever is selling them for the lowest price. Or "I want to sell 5 bitcoins for whatever is the best price right now." and you'll match up to whoever is buying them for the highest price.

And then the price of Bitcoin is just the price of the last trade that happened.


Prices are set the same way as in any other market, which is to say that there is a (continuous, ongoing) process of tâtonnement where (say) buyers find that they cannot purchase at the maximum price they are willing to pay, or sellers find that they cannot sell at the minimum price they are willing to accept, creating pressure to adjust those prices. In some markets, this will eventually lead to relatively stable prices (say, street food), while in others, prices are more volatile, depending on how elastic supply and demand are.

Conceptually speaking, the classic notion of price-setting is that of the Walrasian auctioneer who receives, from each participant in the market, the amount said participant is willing to buy / sell at any given price, and who then proceeds to calculate the equilibrium price, only after which trade will actually take place. Needless to say, like the "invisible hand", this is merely an aid to understanding.

  • $\begingroup$ Isn't the tâtonnement at best a metaphor here? No one is submitting their supply and demand schedules at every possible price, so I don't see how it could be literally true. But, if this is only a story about how prices are set in GE models, how does this answer the question? I suspect that, like in many exchange markets, prices are set by the matching of market and limit orders. $\endgroup$ – BKay Jan 13 at 16:52

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