[drez]

What I don't understand is that bitcoin is always referenced in value to USD, but there isn't enough fluid USD in the exchanges to match what the bitcoin network is theoretically worth. How do they decide what Bitcoin is worth, if the money that it's worth isn't actually around?

Also what happens when a big holder of BTC decides to cash out? Wouldn't it become similar to a typical bank run, collapsing the exchanges (and thus the market)?

[Slartie]

There is no actual "worth" of all Bitcoins as a whole, whether in regard to USD nor in regard to anything else. The only thing that exists is the last price at which a non-zero amount of Bitcoins - usually only a tiny, tiny fraction of all coins, today usually not even a whole coin - has changed hands. This price, taken for every exchange, is then usually averaged to get a "market value" of one Bitcoin.

The "market cap" is then just a number calculated by taking this average and multiplying it with all Bitcoins in existence. Of course, the value would collapse instantly, if just a fraction of these is put up for sale for current market price. Actually you can witness this happening right now (try www.cryptowat.ch and just pick a Bitcoin exchange and watch how the price moves...mostly downward right now...because there's so much selling going on).

In case of Bitcoin it is even more severe, as it is rather well-known that only a fraction of the 16.5 million coins in existence is even accessible and an even smaller fraction of that is actually circulating. There are multiple millions of coins buried on wallets to which the private keys have been long forgotten. Or at least "most likely", because there's no way to prove whether a particular wallet is just inactive, but someone still has the key, or whether the knowledge about the key has been lost forever, and with it any access to the coins on it. I heard about estimates of only 8 million coins being actually accessible and in some kind of regular or irregular circulation...

[thephyber]

> Wouldn't it become similar to a typical bank run

Yes and no.

User behavior drives the market price, certainly. But "bank runs" are only bad because of fractional reserve.

When the bank essentially loans out 80-95% of their assets in order to create more loans/credit (thereby creating $4-19 in new credit for every $1 in reserves), the run can empty reserves and there is pressure for the bank to call in loan repayments early.

BitCoin exchanges (in their core exchange role) don't create credit. They simply convert one currency into another. If an exchange also lends (so users can buy cryptocurrency "on margin"), it is acting in another role, one which is susceptible to "a run no the bank".