The price of Bitcoin is measured in a currency like US Dollar (USD) or South African rand (ZAR) . Here’s a quick Bitcoin to rand price calculator and graph.
This price is set on Bitcoin exchanges all over the world by consumers buying and selling it. Since each Bitcoin exchange operates independently, the market of buyers and sellers will set the price independently on that exchange. In its simplest form, the price of Bitcoin is simply the price that people are willing to pay for it at a given point in time, the middle-point between supply and demand. If buyers think that the price of Bitcoin is too high (the price that sellers want for it), then sellers would be forced to lower their price if they want to make a sale. If buyers are willing to pay a higher price for it, sellers will sell it at a higher price.
Explain it to me like I’m six
Imagine we live in a world with only one type of apple and that these apples, for this demo, all of the exact same quality. In this world, we have a farmer, Sally, who takes her ripe apples to a marketplace to exchange them for money.
Now, if there is only one farmer and there is a big demand for apples (for some reason, everyone wants them right now), she can keep charging a higher and higher price. She’ll say “Hey, I’m selling apples” and a buyer will come over and say “Hey, I’d like to buy an apple!” and they will start trading.
If Sally asks a price less than what the buyer is willing to pay, she’ll make an instant sale. She can keep increasing the price until some point at which the buyer says, “Hey, this is too expensive, I’m not interested in buying anymore”.
The other thing you’re likely to see is competition.
Since we’re living in a place where lots of people want apples, there are now hundreds of apple farmers, all eager to make some money. These farmers will also come to the marketplace with their apples and set up shop next to Sally. They will soon see that by selling their apples a little cheaper, they can get more trades. Through competition and the forces of supply and demand, the price of apples from all the different farmers should soon stabilise.
This is how you get the price of apples.
Getting the price of Bitcoin in South African rand, works exactly the same way.
In the real world, we simply have many traders with Bitcoin, which they either mined or (more likely) purchased at a stage in the past. These traders go to a Bitcoin exchange and they say “Hey, I’d like to sell my Bitcoin” and buyers at the same exchange will say, “Hey, I’d like to buy some Bitcoin”.
Since Bitcoin markets are open to thousands of buyers and sellers, this means that there is healthy competition and a fair market-derived exchange rate.
You will see that the price of Bitcoin on one exchange might be slightly different than the price on another exchange (and the enterprising reader may want to gain from this price difference).
This is the equivalent of when you have two or more apple marketplaces in the same city: maybe the price of apples will be slightly lower at the one and a little higher at the other. Over time, people will buy the apples at the cheaper market (and maybe even sell them at the more expensive market) and the prices should adjust again.
If we have a marketplace in the south of the country but they only farmed apples in the north, there should theoretically be cheaper apples available in the north. And farmers like making money more than they like apples.
Our fictional farmers will make a plan to buy as many cheap apples in the north and sell them down in the south. This will go on until the apples sold by other farmers in the south become cheaper, in line with their prices or more and more farmers also go and buy those cheap northern apples.
If enough farmers go from the south to the north to buy the cheap apples, the merchants in the north will soon start increasing their price, until some sort of equilibrium has been found.
This process of buying something on one market and selling on another at a higher price is called arbitrage.
Price difference in Bitcoin to rand than Bitcoin to dollar (to rand)
I often get asked why Bitcoin is more “expensive” in South Africa (or in South African rand) than it is on US dollar exchanges.
Let me try to explain it in simple round numbers, with no hidden fees, for simplicity sake. Let’s assume:
- Bitcoin is trading at $100 USD for 1 BTC on a foreign exchange
- South African banks say that you need to pay R10 ZAR to get $1 USD
It means that, with all other things being equal, the price of one Bitcoin should be R1000 in South Africa (since R1000 ZAR = $100 USD = 1 BTC). But, why then does it trade at R1090 ZAR per Bitcoin on the South African exchange and $100 on the foreign exchange?
The answer is actually that it’s not more expensive, it’s simply the two points where the South African traders and the US traders agreed on a price on the respective exchanges. Like our farmers who traveled north, Bitcoin traders from South Africa can try to buy the “cheap” Bitcoin on other exchanges, and sell it for a quick profit.
Before you get too excited, remember that the farmers who traveled north probably had other costs involved in bringing the cheaper apples to the south. They had to hire trucks, pay for petrol, pay for tolls and storage to get the apples to the south.
There are also costs involved in buying and transferring financial products. If a trader wanted to buy one Bitcoin (1 BTC) on an international exchange (with a price of $100) and sell it on a South African exchange, the following would happen (I’ll highlight costs in bold):
- The trader would take R1000 to their bank to buy US dollars.
- The bank will say “Thanks! Our listed exchange rate is R10 for $1 USD, with a currency conversion fee of 2.5% and a R25 international sending fee“
- The trader will give R1000, the teller will subtract the 2.5% conversion fee (R25) and the R25 sending fee so only R950 will be left to be converted into $95 USD.
- The 95 USD will arrive on the international exchange (after three to five days — during which time the price of Bitcoin and the price of dollar might have changed, meaning the arbitrageur is taking exposure risk during this time, something that can also cost them money if the exchange rate changes against their favour)
- With banks being banks, the exchange’s receiving bank will charge an international receiving fee of $2.50
- The trader, left with only $92.50, will then proceed to buy Bitcoin
- Since the price of 1 BTC = $100 USD, they end up with 0.925 BTC
- Bitcoin exchanges make money when people trade, so they will charge the trader 0.5% (0.004625 BTC) in trading fees
Now, with 0.920375 BTC the trader sends his Bitcoin from the overseas exchange to the South African exchange. (As mentioned, international bank transfers take a few days, but let’s assume the prices stayed the same during this time). There is a fee involved in sending Bitcoin, mostly dependent on how busy the Bitcoin network is, but for now let’s assume a fee of zero.
- The trader sells his 0.920375 BTC at a rate of R1095 and ends up with R1007.80 ( 0.920375*1095 = 1,007.8)
So, for all the risk and effort, the trader would have made a measly R7.80 profit on the R1000 they sent in this transaction (instead of the R90 he thought he would have made). Lastly, when they withdraw their R1007.80 to their bank account, there is probably a bank withdrawal fee of R10, destroying their profit altogether.
Note: all these numbers are for demonstration only. In the real world, currencies fluctuate, currency trading fees are between 1.5% and 3.5%, international sending fees charged by banks fall usually around R250, the receiving fees are around $20, bitcoin trading fees vary between 0% and 1% and so on. In short, it’s much more complicated than just looking at the sticker price.
So, in summary:
- To convert Bitcoin to rand (or rand to Bitcoin), you’re probably better off buying from a local Bitcoin exchange like Luno, than to try and buy it on the “cheap” elsewhere;
- To get the exchange rate of Bitcoin to rand, use the Luno Price page;
- The price of Bitcoin –on any exchange and in any currency– is determined by the complete market of buyers and sellers.
I hope this was useful? Please send me a message if I missed anything!