Part 1 Bitcoin Spot Price Q & A
Today we’re starting a series answering the FAQ’s of the Crypto world; kicking off with the most confusing: Bitcoin’s Spot Price. It may only be baffling to me because I lack any formal qualifications in Finance (Writing & Film originally), but luckily our CEO and Founder, Nathan Van den Bosch, has the right letters on his business card (B.Ec, M.Comm). Together we attempt to pin down this pesky price.
Carissa: What is the Spot Price?
Nathan: Spot price is only a theoretical price; a midway between what people are buying and selling an asset for. It doesn’t actually exist. For example, if Bitcoin’s last buy price was $10,000 and the last sell price was $8,000 the spot price is $9,000.
So it’s basically just an average?
Yes. The only price that exists is the “strike price” which is based on the bid-ask spread.
You’ll have to define bid-ask spread. I know I’ve nodded along before but I don’t really know what it means.
It’s like buying a second-hand car. The car dealer says, “I’m prepared to sell you a Ford for $10,000.” But you’re only prepared to pay $9,000.
So you haggle until you reach a cross point – $9,500.
You negotiated based on the bid-ask spread then determined the strike price – the price at which the transaction took place.
So if I sell my Bitcoin, I can determine what price I want to sell it for?
Yes, you can list it on an exchange for $7,000; that’s your “sell order”. Or you could use the “market price” which is whatever the next person is prepared to pay. If the next buyer wants to buy 10 Bitcoin at $6,000, the trade will consume your Bitcoin for $6,000.
What if I listed my Bitcoin at $2,000?
It would accept it.
What if I said $10,000?
It would sit there for a while. Buyers wouldn’t be prepared to pay you $10,000 when they can buy from someone else for $7,000.
How is the Bitcoin Market different from the Share Market?
It’s the same principles of trade but Bitcoin prices are not regulated by the Australian Stock Exchange (ASX), like listed shares.
How are shares regulated?
If a share falls more than 20% in a trading day, the ASX will suspend it. As well as protecting shares from extra-ordinary price rises. The ASX might wonder how a share can rise 300% in a day – Bitcoin can. I’ve seen (Cryptocurrency) Ripple jump 60% in an hour.
The ASX is a friction within the trading sector. When you control an asset’s price, you’re determining the tops and bottoms of the market which is distorting the market mechanism. Bitcoin and Cryptocurrency is a completely free market.
But doesn’t ASX intervention provide a level of comfort for investors? Couldn’t Bitcoin drop to $0 tomorrow?
Yes. There’s no safety net. But investment always involves a risk/return analysis; both elements need to be considered in conjunction. For example, one of 2017’s “15 Top Returning Stocks” is Lam Research – up 22% this year. Bitcoin is up 520% this year. Hence risk/return.
How does Bitcoin Trader determine the Bitcoin price on behalf of a client?
I go on to CoinmarketCap – they give me spot and I know that’s a mid-point. If I’m buying – I’ll be paying a bit more, if I’m selling I’ll be receiving a bit less – in a rising market. Someone rang the other day and said they wanted to buy Bitcoin. I told them, “Spot price is at $6,200”. Then I went on to the trading desk and determined the strike price was $6320.
So people wanting to buy Bitcoin are always going to be disappointed if they look at the spot price?
Yes. But even if you go to an exchange and see the last price Bitcoin sold for, it’s not necessarily relevant to your trade. What if that person bought 10,000 Bitcoins? Or someone bought half a bitcoin for a different price. It will rarely reflect what the individual client is buying.
What’s happening to the price of Bitcoin now?
When you buy up the liquidity of the market, the price goes up, because it is becoming more and more rare. That’s what’s happening now. People are holding out – prices are rising. People are saying, “I’m not prepared to sell because my expectation is that Bitcoin is rising; I can see my capital asset going up. I’m only going to sell it to you now if I believe I’ve reached my level of saturation – or I’m expecting a fall and I can buy it back cheaper.”
Do you think the system around Bitcoin price is positive?
Yes, because it’s a completely free market. I saw Ethereum drop from $400 to $13 – for a microsecond then it went straight back up again: a “microdrop”. If you were trading in that very moment you could have bought at $13.
Why would that happen?
There’s no regulator. There are movements. Nobody really understands why. I don’t think anyone has an answer.
That’s the best answer I’ve ever heard.
What would you like to know about Bitcoin?
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