This article will give insight how prices on LiteBit are determined, which factors are involved in this process and more detailed explanation of these factors.
The factors involved in pricing
The prices of cryptocurrency on LiteBit are determined by multiple factors.
The biggest factors in determining the price:
- The market cap of the cryptocurrency
- Exchange surges
- The trading volume
- Influence of third parties (Especially cryptocurrency with a small market cap)
- Transaction costs
- Gap between bid and ask
As seen many factors come into play when determining the price of a cryptocurrency. Due to all these factors, it is not possible to give a fixed service fee cost estimation to the customer. Per order, the so-called "margins" are determined with a calculation with the stated factors above and more.
The average margin is about 2 percent on orders.
Short explanation of the meaning and the impact of these factors
What is a market cap of a cryptocurrency?
The market cap is the estimated value of the total worth of a cryptocurrency. A simple example is that if Example coin is worth 2 euro and there are 1000 Example coins available the market cap will be 2000 euro.
If someone now wants to sell 500 Example coins the market would crash, because half the market wants to sell. With this short example, it is illustrated that smaller market cap cryptocurrency is more subject to larger changes in a short time frame. This is also the reason why there is a buy and sell limit per cryptocurrency.
When there is a quick rise or drop in the price of a cryptocurrency. In these times a minute of delay in price update could mean 5 procent difference on the exchange.
What is the trading volume of a cryptocurrency?
The term trading volume means the amount of cryptocurrency traded within a day or week. The trading volume can be described in amount cryptocurrency or the amount of fiat money like Euro.
The ratio of trading volume and the market cap can give an indication of the number of people trading the cryptocurrency.
Influence of third parties
There are no regulations for cryptocurrency. For this reason, it is not illegal to push the price with a group of investors, wait till others buy in and then sell all their cryptocurrency. Especially investors with a big amount of cryptocurrency can cause a big surge in price.
Transaction costs of cryptocurrency
Depending on the cryptocurrency the transaction costs can be quite big. For some, it can be a few euro cent, but with other cryptocurrency, this can rise to tens of Euros. Some exchanges also ask a fee for withdrawal of cryptocurrency. This is also the reason why LiteBit needs to ask for a so-called "Blockchain" fee to cover these costs.
Gap between bid and ask
In every market, there are people who want to buy a product and people who want to sell a product. In the stock market and the cryptocurrency market this is called bid and ask.
Both parties want the best price for themselves and for this reason the price the bidder wants will be lower than asking price. An agreement is made when a person wants to meet the bid price or the ask price. The image above illustrates a simplified version of this process. What is also notable is that there is a gap between the bidding price and the asking price. For example at the time of writing this article the spread for Reddcoin is eight percent. Especially in low volume and low market cap cryptocurrency this gap can be quite large.