Exchanges play a central role in the bitcoin ecosystem. In addition to facilitating trade, they set exchange rates between bitcoin and fiat currencies such as the US dollar or the euro.

Rates can vary widely from exchange to exchange (which is where the arbitrageurscome in) and from minute to minute (where the other traders enter).

By now, long-time bitcoin traders are well acclimatised to this volatile landscape. Take, for example, the wild price swings at the middle of this month. From a high of $596.00 on 8th August, the price tumbled 15% to a low of $503.96 just six days later.

But what makes bitcoin’s price move in the first place?

Let’s start by examining the inner workings of a digital currency exchange.

First, there’s the electronic order book, which keeps track of buyers’ and sellers’ interests. At every price level, this book records open ‘buy’ and ‘sell’ orders, including their cumulative sizes.

Often you’ll see order books displayed as tables showing open buy orders (known as ‘bids’) and sell orders (known as ‘asks’) at price levels below and above the last market price:

The next trade in the example above will execute either at the bid of $96.281 in case of a seller stepping in, or at $98 if a buyer is willing to pay the ask; more on this later.

It’s important to note that transactions between sellers and buyers only occur if there are open bid and ask orders at the same price level.

You will never see this happen in an order book though, so there must be a piece missing in the puzzle. To better understand how exchanges really work, we also need to know about two basic types of orders.

Orders in the book are all ‘limit orders’, meaning they will only be executed if anyone is willing to trade at the requested price level.

“Sell BTC 2.3 at $593.18″ is an example of a limit order asking for $593.18 per 1 BTC. “Buy BTC 0.32 at $592.03″ would be a limit order bidding for $592.03 per 1 BTC.

On the other hand, ‘market orders’ are orders without a price tag attached. For this reason they don’t show up in order books. Instead, they are immediately executed at the next best limit order in the book.

Traders who place market orders are eager to have their orders executed (‘filled’ in trader jargon) as fast as possible, so the price is secondary.

Let’s assume for a moment that there are no matching limit and market orders at the exchange.

There are a lot of limit orders in the order book – as shown in the example above – but no market orders are triggering any transactions.

Clearly, the order matching engine is out of work. No transactions will take place and the exchange rate will stay at the price of the last transaction in consequence.

This will apply until the exchange receives a new market order, in which case one of two things will happen:

a) If there’s still enough limit order volume at the latest transaction’s price in the order book, the new market order gets filled at the same price as the last transaction again, so bitcoin’s price doesn’t change.

b) If there’s not enough order volume to fill the market order, the exchange will fill the rest of it using volume from the next best price level in the order book. In this case, the price changes to the next best price level and – volià – price has just moved.

So, the (very) short answer to the question would therefore be: buyers and sellers placing market orders do move price.

For more tips and tricks on bitcoin trading, check out Christoph’s previous primers onunderstanding price charts and spotting trends.  

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Multinational bitcoin exchange igot will today launch the first bitcoin exchange in the United Arab Emirates (UAE), to capitalize on the unique opportunity posed by the market.

The Australia-based company’s founder Rick Day told CoinDesk the new exchange will operate with a Commercial Brokerage License, approved by the local government. It has also secured local banking partners for direct deposits and withdrawals in UAE dirhams (AED).

Igot has hired a small team for business development and customer support for its Dubai office.

Day added that igot will continue to offer the same flat 1% trading fee to all its customers worldwide, with no additional fees for deposits or withdrawals in either bitcoin or fiat currencies.

The exchange is aimed more at consumers than professional traders, with a simple buy-sell interface. However, it recently implemented a feature called ‘Future Trade’ which functions like limit orders on a more advanced exchange, giving customers the option to set their price and wait for bitcoin’s value to rise or fall to that level before executing the trade.

As well as bank access, igot is also working with local payment processors to give users more options in the coming months.

As well as having a concentration of high net-worth individuals among its citizens, about 60% of the UAE’s workforce consists of expat Indian workers, both professional and manual, who often send their money back home.

In fact, foreign citizens make up a staggering 91% of the UAE’s population of 9.2 million, with 1 million Indians representing the country’s largest overall group.

Day said that, given that India is currently igot’s largest market outside Australia, its presence in the UAE puts the company in a very interesting position.

“Our strategy to expand igot is based on a pairing system. India is one of our best performing markets. In terms of trade volumes, I think we’re the biggest local exchange there. Indians sent $70bn home in 2012.”

Igot will also target UAE’s wealthy native population, as well as its institutional investors, all of whom have a diverse investment portfolio. The UAE economy is the second largest in the Arab world.

For a country now famous as a world hub for capitalism and rapid development, the UAE has seen relatively little action on the bitcoin front.

So far, news has been limited to one pioneering pizzeria and a startup, Umbrellab, which offers payment solutions including bitcoin and was reportedly trying to integratebitcoin ATM functions into Dubai’s existing payment kiosk network.

Igot’s Day said forming banking relationships was never easy, but the company was able to use its established banking track record in Australia, New Zealand and India to state its case with UAE bankers.

Headquartered in Adelaide, Australia, igot has always had plans for expansion into the potentially lucrative markets of Asia and the Middle East.

Day said the company had processed more than $25m worth of trades in the seven months since it launched. Users executed over 10,000 trades via the Future Trades feature, a number that spiked during the bitcoin price volatility of the past few weeks.

It also has a $15 friend-referral scheme and has implemented Jumio Inc’s BISON ID verification system, which has seen the company’s fraud rate drop by 93.29%.

Igot uses the same homepage and interface internationally, but users can connect directly to bank accounts in Australia, India, UAE, Hong Kong, Singapore and New Zealand. There is also the option to use other international bank accounts via the SWIFT network.

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Beyond the practical security advantages of shifting away from credit cards, Castillo noted another curious benefit: removing a somewhat ironic payment method. For Castillo, the purchase of gold with credit doesn’t make sense.

By comparison, he sees digital currency’s underlying technical characteristics and the intrinsic value as a worthwhile investment that makes it a payment method worth accepting.

Castillo cited interest among his company’s customer base – and broader enthusiasm among the precious metals community – as the driving force behind his company’s move to go even a step beyond accepting bitcoin and removing credit cards.

After seeing so much success with bitcoin, Castillo said Agora Commodities now has a digital currency exchange currently in development.

While work still continues on the project, Castillo said that the company is collaborating with an existing exchange to build back-end support, with a portal expected to be integrated with Agora’s online store.

He explained:

“Bitcoin fits perfectly with gold and silver, right? So if people come to the site and want to buy gold and silver, why wouldn’t they want to buy bitcoin from us as well?”

This would build on an existing service that Agora is affiliated with, Castillo said. By working with a third party, Agora will soon allow its customers to exchange precious metals for bitcoin.

Castillo added that bitcoin fits well into the broader perspective held by precious metals investors, and he foresees broader involvement from gold investors as the digital currency continues to grow in prominence.

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London-based Aeguana is marketing a new vending machine that supports a wide range of payment methods including bitcoin. The machine has a spec sheet that wouldn’t look out of place in the PC of yesteryear. It measures 1000 x 400 x 250mm and weighs 38kg, which is relatively compact for a vending machine. The device sports a 15.6-inch 1366×768 advertising display, stereo sound, optional WiFi and 3G/GPRS connectivity.

So why is it so small? Aeguana insists coins belong in the past, so the machine is designed from the ground up to rely on contactless chip or swipe cards and, of course, bitcoin. Therefore, there aren’t that many mechanical components inside and the final product can be a lot smaller than traditional coin-operated vending machines.

American Green decided to integrate bitcoin support into its ZaZZZ vending machine. What sets it apart from the rest of the field is the fact that it dispenses marijuana rather than sodas and candy.

The ZaZZZ was designed for the US states with a liberal attitude towards marijuana. It was demonstrated in Colorado in April.

California-based Bitcoin Kinetics is developing a vending machine for cryptocurrency users. The company already offers a number of bitcoin machines, including the Bitcoin Kinetics BitWasher, its $1,950 washing machine.

The commercial grade washing machine is based on a Samsung washer-dryer. The brains of the operation come from Intel, in the form of an Intel Edison board.

Bitcoin Kinetics also supplies vending machines, ticket machines, parking meters, ATMs, payment kiosks, personal payment devices and arcade payment devices.

While we are on the subject of DIY, Bitcoin Kinetics offers a unique product that can transform many machines capable of accepting money into bitcoin machines.

BitSwitch is a self-installed bitcoin hardware payments system. It is available on Arduino, Raspberry Pi and Intel Edison hardware. GSM, Ethernet, Bluetooth, NFC, RF and WiFi connectivity is available, along with touchscreens and other add-ons. The basic kit, which includes an Arduino board, relay, wires and power supply, costs $55 plus shipping.

Liberty Games’ bitcoin pinball machine, inspired by gaming company Stern’s, is reconditioned by Liberty Games technicians with added bitcoin support. The machine is based on a Raspberry Pi board.

Liberty Games is not new to the world of bitcoin. Earlier this year the company announced a bitcoin-operated arcade machine and last year it developed a bitcoin pool table, complete with a QR code and LCD screen.

One potential application for bitcoin involves an industry that keeps the world running. Some gas stations have started accepting bitcoin this year, but there is still no dedicated hardware for this niche.

This basically means you can fill up for bitcoin in Colorado or in Malaysia, but you have to pay for your gas at the counter elsewhere.

Although a fully automated bitcoin filling station has not been deployed yet, Bitcoin Kinetics is developing one.

BitPumper is based on the company’s BitSwitch and it can be retrofitted to existing pumps by attaching a relay board and a controller board. When the customer makes a transaction and it is verified the hardware starts pumping the fuel. The system is not available commercially yet.

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A weekend article within the the big apple Times examined the ideologic underpinnings of the bitcoin


cryptocurrency. whereas the article got most of it correct, it lost some further principles that area unit core to the adopters of bitcoin.

First of all, a vote for bitcoin is actually a vote against the established financial order with its centralized authority, inheritance infrastructure, and decreasing monetary privacy. Moreover, it's additionally a vote for associate degree individual’s selection in currency and freedom of dealing while not payment blockades and police investigation. To each the technical and non-technical, bitcoin represents changeability, changelessness, and user-defined privacy.

As The the big apple Times discerned, further sides that bitcoin adopters realize engaging embrace however bitcoin demonstrates the absurdity of a central bank’s unlimited supplying model and therefore the unconnectedness of self-seeking capital controls.

A decentralised cryptocurrency separates a functioning medium of exchange from state management.

Nothing illustrates this a lot of starkly than a physical bitcoin on a coin-shaped metal disc, that may be thought-about a negotiable financial instrument in some jurisdictions. Lately, bitcoin has appreciated such a lot that the older ten BTC and twenty five BTC Casascius coins should currently be declared to North American country Customs once coming into or exiting the North American country.

FinCEN’s involvement

On Nov twenty seventh, Casascius founder microphone writer received a letter from Financial Crimes Enforcement Network, the North American country Treasury bureau accountable for safeguarding the economic system from illicit use and combating hiding. The letter tacit that his three-year-old business of commercialism coin-shaped items of metal may be outlined as a cash services business requiring registration with Financial Crimes Enforcement Network and presumably registration with the money transmitter regulators in every individual state.

The Financial Crimes Enforcement Network claim lively mostly on the premise that writer had no manner of confirmatory that the coins were being shipped to constant person, or persons, that purchased the things with bitcoin. writer believes that the coins ought to be viewed as collectibles.

Subsequently, writer suspended operations of his coin-shaped metal business and ceased taking orders for purchases of latest product. He additionally engaged legal counsel to establish if his business was so acting as a cash transmitter below the law.

In phonephone conversations with writer, he reiterated to ME that the continued operation of his business was secondary to establishing the necessary freedom-to-contract principles and selection in currency principles. in line with writer, he took the forceful step to suspend as a precaution, but he doesn't believe that he's in violation of any existing laws as he's solely causation empty personal keys within the mail.

Business model

Under this business model, Casascius receives associate degree order and therefore the payment received doesn't involve any North American country currency or the other countries’ currency. He accepts bitcoin for the sale of a spherical metal disc with a non-public key connected below a photo. The sturdy name of
Casascius and its method is predominate to the success of a physical bitcoin, as a result of it involves trusting the integrity of a 3rd party.

During cargo, the coin-shaped piece of metal is worthless and corresponds to a bitcoin address containing zero bitcoin. once the recipient receives the coin-shaped piece of metal, associate degree acceptable quantity of bitcoin is transferred to the corresponding public key, or bitcoin address.

coin-silver

In associate degree alternate approach, Casascius might send the coin-shaped metal and permit the recipient to initiate the transfer of bitcoin to the corresponding bitcoin address, thereby removing writer from handling the bitcoins in the least. therein state of affairs, writer wouldn't be handling North American country bucks or bitcoin therefore it might be tough to ascertain however any doable cash transmission was occurring.

Recalescence Coins, LLC in Port woodlet, Evergreen State has already captive to the model of commercialism blank coins as a results of the Financial Crimes Enforcement Network letter received by Casascius.

Caldwell and his lawyer arrange on responding to the Financial Crimes Enforcement Network letter, describing their method and outlining a satisfactory business model.

Casascius uses brass tokens within the form of a coin. Another business primarily based within the kingdom sells similar coins. different corporations might even as simply use rectangular plastic or special paper to store a hidden personal key. they may even be divided, sent singly, and re-joined later to make a whole personal key. However, the need to separate {a personal|a personal|a non-public} key would mean causation empty private keys within the mail somehow represents a kind of cash transmission that it doesn't.

Form factors

Also, type factors matter de jure, or they must. Phil Zimmermann round-faced a somewhat similar scenario once he couldn't export his email encoding program, Pretty sensible Privacy (PGP), because of North American country restrictions on the mercantilism of encoding with “munitions-level” strength. a gaggle of volunteers then transcribed the pc code line-by-line into a book format to export PGP as a book to be re-transcribed and compiled on the opposite facet.

Money is that the speech of commerce and “we want freedom of speech in our monetary commerce,” says microphone Gogulski, a unsettled ex-American living in capital, Slovakia.

The Liberty greenback case exemplified however way a government can go once alternatives to the required unit of account begin to emerge. the freedom silver coins containing real silver were embarrassing to the govt that was supply the pretend silver coins, therefore the public had to be protected against thinking that the important silver coins were really cash. Huh? Government prosecutors within the case laughingly delineated  Bernard von NotHaus as representing a “unique kind of domestic terrorism“.

“Bitcoin place the facility of “survivable” cash directly within the hands of the plenty. it's a testament to bitcoin’s survivability that it still exists these days.”

All cash is associate degree illusion at some level, as a result of like language and faith, its proliferation associate degreed success depends on growing adoption from an progressively larger pool of adherents.

“Bitcoin put the power of “survivable” money directly in the hands of the masses. It is a testament to bitcoin’s survivability that it still exists today.”

The creator of the Bitcoin protocol gave the planet a technique to call down its own financial illusion. the explanation this can be a present is as a result of, before bitcoin, different financial illusions depended either on tender laws for his or her illusive price or physical objects like gold and diamonds that area unit simply seized.

Bitcoin place the facility of “survivable” cash directly within the hands of the plenty. it's a testament to bitcoin’s survivability that it still exists these days.

Bitcoin isn't permissible to exist as a result of numerous governments area unit bitcoin-friendly or pledge to support innovation. Bitcoin exists these days exactly as a result of it's distributed and decentralised, designed to survive political establishments. And, it's on the far side arrogation as a result of it's digital. If it may be eradicated, it might are eradicated as before long because it stone-broke out of its niche market with some dish deals back in early 2010.

I perceive from sources that about twelve such letters were issued by Financial Crimes Enforcement Network within the last thirty days. If so, the aim hopefully is to raised perceive these bitcoin business models and not simply to use spectacular letter paper in persuading voluntary business suspensions. within the case of Casascius, I concern the latter.

Components of index

1. Developer interest on GitHub.
2. Merchant adoption as a measure of consumer adoption.
3. Wikipedia views measuring bitcoin education.
4. Hashrate by logarithmic scale corresponding to orders of magnitude.
5. Google searches captured by the number of times “bitcoin” appears.
6. User adoption as measured by wallets.
7. Transaction volume on the bitcoin network.

Always about price

Focus on investing

Another top-10 story regarding Mark T Williams’ failed prediction of a bitcoin price collapse in Q2 is also arguably price-related. In short, there continues to be very high interest in bitcoin’s price.

One of the reasons bitcoin’s price was such a big topic in Q2 is because it witnessed a significant recovery, rising 39.4% during the second quarter.

A number of factors explain bitcoin’s price rebound in the second quarter, including what appears to be a stabilizing regulatory situation in China as well as continued interest in bitcoin by large, well-established brands such as DISH, Expedia, and Apple (Figure 2).

It’s important to note that bitcoin’s price at the end of Q2 is still 15% below where it started in 2014 and 33% below its 2014 high on 6th January, when it reached $951.39 on the CoinDesk Bitcoin Price Index (BPI).

While Q1 was very positive for bitcoin in terms of venture capital (with $57m invested), the second quarter saw $73m invested – a 28% increase over Q1 (Figure 3).

If we include the early Q3 2014 VC investments we’ve seen (notably Xapo’s recent $20m round), a total of $240m has been invested in bitcoin startups since 2012, and $150m (63%) has come in 2014 YTD alone.

One of the more widely discussed elements of the Q1 State of Bitcoin report was our comparison of investment in early Internet and early bitcoin startups.

VCs such as Marc Andreessen have compared bitcoin’s overall potential, as well as its current stage of development, to the Internet circa 1993. Our comparison was meant to assess whether VCs are backing up their lofty bitcoin statements with their wallets.

Notwithstanding a number of methodological issues which we discussed previously with making this comparison – including inflation and changes over time in the cost of launching a startup – we feel the comparison is still interesting and useful.

In April we were projecting a total of $200m invested in bitcoin startups for 2014. While close, this figure still trailed 1995 early-stage Internet investment by a significant margin. However, based on recent investments, including the aforementioned $20m Xapo round, we are now projecting a total of $284.5m to be invested in bitcoin startups this year.

This figure would comfortably exceed the $250m invested in first sequence Internet startups in 1995 (Chart 1).

The 2014 run rate for publicly-disclosed VC investment in bitcoin startups would also be over 3 times more than the total investment VCs made in bitcoin startups in 2013.

In short, the ‘wall of money’ flowing towards cryptocurrency startups continues to grow and will continue to have a positive impact on the industry’s prospects.

We have been working on expanding our database of key bitcoin data so that we can more closely monitor bitcoin’s progress and make forecasts on key adoption metrics, such as wallet use and merchant acceptance.

So that you can have a quick, one-page dashboard that measures bitcoin’s progress, we are introducing our Key Bitcoin Adoption Metrics (Figure 4).

For the first time, we are also making year-end forecasts for the total number of bitcoin wallets (Figure 5) and the total number of bitcoin-accepting businesses (Figure 6).

Why not come back in two quarters to see how we’ve done with these forecasts?

In the meantime, we hope you enjoy the State of Bitcoin Q2 2014 report. We’d like to thank you, our readers, for making CoinDesk the world’s leading source of bitcoin news, analysis and perspective, and we very much welcome your feedback on how we can make the State of Bitcoin even better.

[1] You can access CoinDesk’s full spreadsheet of all bitcoin venture capital deals here.

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