What mathematically determines the price of a crytocurrency?

Question

For those of you involved in crypto-currency, what mathematically explains the up's and down's of crypto-currency value? Such as the peaks and troughs one sees on crypto graphs.

What might be the advantages of understanding the mathematics behind crypto-currencies?

Thanks

Answer 1

What determines the price of any asset, cryptocurrencies included, is the price that human beings are willing to pay when they exchange that asset for cash. This isn't mathematical but psychological.

The reason that this fluctuates up and down is (1) people do not all view the asset equally optimistically; (2) fundamental properties of the asset may change.

For an example of (1), I might sell my asset when it's "price" (i.e. the commonly traded price) gets as high as \$100, because I don't think it's worth more than that. However, someone else who disagrees with my view will be happy to buy that from me at \$100.

For an example of (2), if there is discussion of government regulation of an asset, that will potentially cause everyone to be pessimistic at the same time, which will drop the price.

Answer 2

In order to have a transaction of cryptocurrency, stock, minerals, regular currency, or any other openly traded good, you need two things: A willing buyer and a willing seller. They will agree on a price they both think is fair, and the transaction will happen. That's all there is to it, formally.

So the price of a good is at any point in time exactly where there are both buyers and sellers who find the price fair (at least for things that are sold and bought lots of times per day, so that both buyers and sellers are informed on what other people think, and thus develop a sense of what's fair).

Note that sellers have in mind what they paid for the thing (which is irrational, but such is humanity), and what they could potentially get out of it if they sell at a later date instead. Buyers think about what they can get for it at a later date.

This means that they will both try to think hard about what the general market will think is a fair price in the future, and they will let that play a big role in what they think is fair today.