Monday, February 17, 2014

The Price of a Bitcoin

What is the current price of one Bitcoin?

This is a very simple, straightforward question that should have an equally simple, straightforward answer.

And, yet, I haven't found the answer anywhere — not among bloggers, technologists, traditional journalists, economists, traders, or venture capitalists.

As of this writing, Mt. Gox indicates it's $374; Coinbase signals $658; BTC-e calls for $635; Bitstamp points to $655; Justcoin shows $679; LocalBitcoins seems to offer a range of $664–$828...

So, which is it? Do I get to choose? Does my transaction counterparty get to choose? Is it an average? Can I buy low (and then immediately sell high)? Maybe it’s the median?

In the world of equities — which feels like a reasonable parallel, considering so many people seem to be buying / holding Bitcoins as an investment, rather than an everyday currency — it would be like seeing wildly different digital quotes for Google's shares at every brokerage simultaneously: $1,202.80 at Schwab; $986.12 at E*TRADE; $759.54 at Fidelity; $844.03–919.99 at TD Ameritrade…

Odd, right?

The only thing I think I can think, then, is that there are actually two components to any stated Bitcoin “price:” (i) the actual inherent value of one Bitcoin and (ii) the premium (or discount) associated with the various Bitcoin exchanges / platforms.

I’ve never seen or heard it presented in such a manner, but it seems to be the only plausible conclusion, in my mind.  

Which then begs the question: what is the actual inherent value of a Bitcoin versus the associated exchange / platform premiums (or discounts)?

Perhaps the answer is in Mt. Gox, where mounting distrust has likely destroyed any embedded premium in the platform?  If we assume that prices on Mt. Gox are even close to valid, would it then be reasonable to conclude that the inherent value of a Bitcoin is at or, perhaps, just below the $374 level, and that all other prices on all other exchanges are padded with ~$300 of premium?

Then again, what if Mt. Gox pricing now actually reflects a massive discount due to heightened fears of liquidity?  Maybe, then, the inherent value is really closer to $600 and there’s ~($225) of risk implied in a trade on Mt. Gox??

One Bitcoin; two wildly different, yet justifiable, possible values.

Which is correct?  I don’t know, and I’m nowhere near intelligent enough to solve the riddle (were I even inclined to try).  But, I would hope that with all of the attention being paid to Bitcoin by “smartest people in the room” types, an answer would be forthcoming.  Apparently, the future of commerce depends on it.


  1. I've been doing some bitcoin-related projects, and the issue is that no one seems to know what it is. Is it a payment system? A new world currency impervious to inflation, to get us through apocalyptic times? A cash substitute for making anonymous transactions online? Just another speculative tool? Each answer gives you a different point of valuation, which makes for the wide spread and, of course, the sheer kookiness of the whole project.

  2. Here is the answer. It is somewhat complicated. Perhaps using your world of equities example I can explain it. In the world of equities, the price from exchange to exchange is different. Sometimes by a few cents and for maybe a second. But in that world of deep liquidity and lightspeed arbitrage you dont see it as different. The average person doesnt see that the prices for a security can be very different exchange to exchange.

    Now imagine a stock exchange in North Korea, that wants to trade IBM stock. Getting money into and out of NK would be hard, and you might imagine you wouldn't exactly trust the local regulatory authorities or banking system. So the price of their IBM might be way off from the price at the NYSE, because nobody can get money there, or no one can get the shares of IBM out. This is kind of the situation with bitcoin. The exchanges have lots of local issues, that combined with very limited liquidity and absence of consistent arbitrage taking place across exchanges because of these issues. Over time as the market grows these differences will disappear.

    To get the best most accurate price go to Notice that volume column all the way on the end. Trust the exchanges with the most consistent volume, BitstampUSD is usually the most reliable USD price for now....

    1. Thanks for your thoughtful response. I certainly understand the notion of market depth and liquidity, among other local issues - and the example of NK is illustrative; but it only reinforces my perspective that there are two components to the price that no one appears to have yet sufficiently disaggregated - inherent Bitcoin value and exchange premium. Without that information, how much confidence can we really have in the underlying currency?


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