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 force of buyers and sellers will set the price independently on that exchange.
A simple example
Imagine we live in a world with only one type of apple and that they for this demo, all of the 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, she can keep charging a higher price and higher price. She’ll say “Hey, I’m selling apples” and a buyer comes over and he says “Hey, I’d like to buy an apple!” and they will start trading. If Sally charges less than what the buyer is willing to pay, she’ll make an instant sale. She can in theory keep increasing the price until the 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 witness is competition.
Since we’re living in a place where lots of people like apples, there are now hundreds of apple farmers, all eager to make some money. These new farmers will come to market with their apples and set up shop next to Sally. They will soon see that by pricing their apples a little cheaper, they can get more trades. Through healthy 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 (in rand).
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 may see that the price of Bitcoin on one exchange may be different than the price on another (and the enterprising reader may want to gain from this price difference).
This is the equivalent of when you have two or more apple markets 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 only buy the cheaper apples and the prices should adjust again.
If we have a market is in the south of the country and they actually 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 enterprising 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 on one market and selling on another 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’s say Bitcoin is trading at $100 USD on a foreign exchange and the South African bank says that you need R10 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 per Bitcoin?
The answer is actually that it’s not more expensive, it’s simply the point where the market agrees on the price. Like our farmers who traveled north, Bitcoin traders from South Africa can try to get access to 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 had other costs involved in bringing the cheap apples to the south. They had to hire trucks, pay for petrol, pay for tolls and storage to get the apples to the south.
If a trader wanted to buy one Bitcoin on an international exchange (listed at $100) and sell it on a South African exchange, the following would happen. I’ll highlight fees in bold:
- The trader would take R1000 to their bank to buy dollar.
- The bank will say “Thanks, our exchange rate is R10 for $1 USD, with a 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 convert R950 into $95 USD.
- The USD will arrive, after three to five days, on the international exchange
- 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, he ends up with 0.925 BTC
- Bitcoin exchanges need to make a living, so let’s say they charged the trader 0.5% (0.004625 BTC) trading fees
Now, with 0.920375 the trader sends his Bitcoin from the overseas exchange to the South African one. International bank transfers take a few days, but let’s assume the prices stayed the same.
- 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 he sent in this transaction (instead of the R90 he thought he would have made).
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.
So, long story short:
- 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!