Why is a Bitcoin valued at over $16,000 (at the time of writing), while a single DOGE is worth only $0.10? The intricacies of price discovery could cover an entire college term, but let’s keep it as short as possible.
The key term is the classic ‘supply and demand’:
Supply: How many sellers there are - how many people want to pass on an asset for a price
Demand: How many buyers there are - how many people desire an asset
Both these parties, buyer and seller, are self-centered of course, and so sellers want to get rid of their asset for the maximum amount, and likewise buyers want to gain the asset for the minimum amount.
This results in the following behaviors for the asset’s price:
Supply > Demand => Price falls
Supply < Demand => Price rises
In the crypto space in particular (and similarly in all trading situations) as trades are made, the price is established. Assets are only worth what the seller is willing to part with them, and buyers are the opposite. This ‘tug of war’ results in an eventual agreed-upon trade. Ultimately, if people aren’t buying (no demand) this results in no price, and the asset becomes worthless.
Let's dive a little deeper into how this works.
First, let's consider where the price we see shown on various sites is sourced. If you take a look at various exchanges, like Binance or HollaEx, or non-exchange sites like Google or Coindesk, you may notice very slight differences.
This gets to one of the vital aspects of understanding. A monolithic, single, price does not exist. Exchanges differ due to having different users with different motivations, and non-exchanges as these have various methods of gathering their ‘single’ price (generally an aggregation of multiple exchanges).
So knowing that non-exchanges get their prices from multiple exchanges, how then do exchanges themselves display a price? A good way to see the fleeting nature of a ‘single’ price can be seen on the Binance BTC/ USDT market.
Looking at the price it is continually changing, this is because the way exchanges generally define their price is the last trade that occurred. This means that each new agreement between a buyer and seller results in a new price, which for a busy market like Binance’s BTC/USDT one, means a continual stream of new prices.
Expanding our scope to comparing multiple exchanges, we see very minor differences in prices for major markets. This is due to actors known as arbitrage traders who profit from price differences and in doing so, bring the prices across different exchanges close to each other.
Take for example HollaEx Token (XHT), we can see that there are three separate prices over the three exchanges it is offered on. Most of XHT’s activity is on HollaEx Pro Exchange, generally, a higher trade volume indicates a more accurate price.
Let’s take a more (in fact the most) popular asset Bitcoin. Going back to our earlier concept of ‘supply and demand’ what causes the rises and falls that are currently hallmarks of Bitcoin?
The past few months have seen the price of Bitcoin decreasing, and thus we can infer that supply was greater than demand, more sellers existed than buyers, giving buyers the power of which seller to choose, and sellers being pressured into lowering their prices to be the chosen seller.
When the great rise we saw at the end of 2021 occurred, this was due to the inverse. More buyers, therefore more choice for sellers and thus a steady upwards trend on the prices offered.
New tokens or coins exist are more akward. Of course there the lower interest in them means a lower trade volume (how much of a token is moved each day), this means this ‘tug of war’ is not quite as active and thus the settling of price is tricky, and potentially more volatile (positively or negatively).
In summary, prices are just signals of the buy/sell (market demand) activities and single prices are only estimates, but historical price detail leads to the next point, charts!
Candlestick charts, are becoming objects of fascination among a more broad population. The Japanese invented these charts to help price rice back in the day, but let's stay on topic.
Charts are simply the historical record or accumulative timeline of all sales put together in a nice graphic. Without sales, there will be no data, so no chart, and below is the result.
Does this look familiar? Perhaps you’ve rarely seen this kind of chart because it is what token and coin creators want to avoid. The dreaded flat line.
Why does this happen? Well, if we go back to prices and where they come from, being they are an accumulation of all buying and selling activity (trades, sales, transactions, whatever term you prefer), then we can easily conclude that nobody cares to buy and sell this particular token at this particular price.
As you can imagine this is a serious chicken and egg problem. It goes back to markets, marketing, product, and the whole point of smart business. You can only sell if people want to buy. There are however solutions to help jump-start markets and help push, and maintain, price discovery. Praise be to Satoshi!
These services are what we call market-making services, but they don’t come cheap. The market makers job is to simply put buy and sell orders up so that when new people come along looking to buy and sell that there is at least a way for them to buy or sell. This is also called liquidity providing.
Market making can be handled by the token creator, or any one who has an interest in assisting the token. These parties put up their own capital for buying back the token, whilst selling the token at the same time, stimulating that movement and contributing to the chart history.
Their aim would simply be to keep the market balanced so as to satisfy demand from both buyers and sellers of the token. As you can imagine this isn’t as simple as it sounds, however with tools like HollaEx can be made simple. There are even automated bots to do this buying and selling, however, they require some initial capital to run.
How price Charts Work:
These candlestick charts are fairly intuitive to understand, so let’s take a quick look at the rules of how they get drawn.
The fundamental elements of the chart are the:
X-axis - The time period, this can often be changed to see long term or short term price changes
Y-axis - The price of the asset
Candlesticks - The actual drawn on element explained below
The candlestick is the primary information element.
In the above image from Investopedia, we can see the archetypal candle. Each period (above uses just a day, but this period could be a week or even minute by minute) has a single candlestick which- conventionally- is green if the price is increasing (opening price < closing price) or red when decreasing (opening price > closing price).
These terms opening and closing price are what they sound like; opening price: is the price of the asset at the beginning of the period, and closing price: is the price of the asset at the end of the period.
The little lines (or wicks as they are called) on the top and bottom of the main body, show the highest and lowest price the asset was bought for within that period.
Let’s look at a quick example to understand this concept. In this screenshot, each candle represents a time of one hour of the BTC/ USDT market on HollaEx Pro, using a white label exchange system to helps with coin price discovery. Looking at the highlighted candle we can see that at the start of the hour (2 pm in this case) the price was around $16,820, and ended the period at just over $16,840. As the opening price was lower than the closing, the chart is colored green. In this period 2 pm-3 pm, the highest anyone purchase was around $16,860, and the lowest was just below $16,800.
There is a lot more to charts that could be an entire course, but that can be left to another article.
Anyone can set a price (HollaEx OTC makes this easy). However, if people aren’t buying whatever it is being sold then there is no value. No buyers = no prices. To have a dynamic up-and-down price chart, an orderbook is needed with both buyers and sellers.
Price discovery is the process of determining the price of an asset through the interactions between buyers and sellers in the market. Prices are determined by the forces of supply and demand and reflect the value that the market participants place on the asset.
Price discovery is when people figure out how much something is worth. This has historical occurred on exchanges. Exchanges do this by allowing the action of buying and selling (exchange) within the marketplace between people, or trading bots. The price is decided by how much people want it and how much there is to sell (AKA: supply and demand). This helps us know how much to pay for things.