On your crypto exchange’s trading platform, when looking to trade a specific cryptocurrency like bitcoin (BTC), you will see a bunch of numbers known as the “bid” and “ask” prices.
But what are these prices? And what do they mean?
Understanding the mechanics of pricing is crucial to understanding how crypto exchanges work.
In order to have any kind of market, transactions need to occur.
And in order for transactions to occur, you need to have both buyers and sellers.
On a spot crypto exchange, a buyer is a person who wants to buy a cryptocurrency. And the seller is a person who owns a cryptocurrency and wants to exchange it either for fiat currency like U.S. dollars (USD ) or for another cryptocurrency like ether (ETH).
The bid and ask prices are the prices at which other buyers are willing to buy and sellers are willing to sell.
Buyers bid and sellers ask (or offer).
When entering a buy order, your order needs to match with a seller. And when entering a sell order, your order needs to match with a buyer.
So when you see a price quote:
- The bid is the price at which you can sell
- The offer is the price at which you can buy
How Bid and Ask Prices Work
A buyer wants to buy at the lowest possible price, while a seller wants to sell at the highest possible price.
So for a trade to happen, the person looking to buy and the person looking to sell have to agree on a specific price.
A crypto exchange is structured to constantly find a price that both the buyer and seller will agree on.To come up with a price, a crypto exchange provides a trading platform where crypto traders can submit orders stating at what price and how many units they are willing to buy (AND sell) a specific cryptocurrency.
Said differently, a crypto trader looking to buy or sell a specific TRADING PAIR will state a specific PRICE and specific QUANTITY.
These orders are then displayed and can be seen by everyone trading on the exchange.
In the trading world:
- The word “bid” is the price someone is willing to buy,
- The word “ask” is the price someone is willing to sell ((also sometimes referred to as an “offer”).
In normal circumstances, the bid price is lower than the ask price.
The slight price difference between these two prices is known as the “bid-ask spread” or usually just the “spread“.
- The highest price that someone is willing to buy a crypto at is known as the “best bid“.
- This best bid price guarantees the highest possible price for any seller at that particular time.
- The lowest possible price that someone is willing to sell at is called the “best ask” or “best offer”.
- This best ask price guarantees the lowest possible price for any buyer at that particular time.
This mechanism of ” best bid” and “best ask” is an effective way to keep the market fair. It’s designed to give traders the best possible price available at that moment in time.
How do Crypto Exchanges Use Bid and Ask Prices?
Crypto exchanges match buyers and sellers together and automate the entire process.
On their trading platform, after you’ve selected a trading pair (a crypto/fiat or crypto/crypto pair), when you want to buy or sell, you’ll be provided an order form where you can place the following order types:
- Market order
- Limit order
A market order will execute immediately at the current best available price
- If you’re buying, your trade will execute at the “best bid” price.
- If you’re selling, your trade will execute at the “best ask” price.
A limit order lets you set a specific price for the order to execute.
- If you’re buying, you can place a buy limit order and specify a “limit price”, which is the maximum price you’re willing to pay.
- If you’re selling, you can place a sell limit order and specify a “limit price”, which is the minimum price you’re willing to accept.
Traders often use limit orders to have more control over execution prices.
And it is the buy limit and sell limit orders that provide liquidity on a crypto exchange.
- The buy limit orders are the BIDS.
- The sell limit orders are the ASKS.
The crypto exchange aggregates these bids and asks and with this data, sets the current best available price(“market price”) in real-time.
Below is a simplified account of how this works on most crypto exchanges.
The green bars show the volume of bids (buy orders) and the red show the volume of asks (sell orders).
Whenever a bid and ask price “cross”, this means that a seller will sell at a price that a buyer is willing to pay OR a buyer will buy at a price that a seller is willing to accept.
When this happens, the crypto exchange immediately matches and fills as much volume as it can for those orders.
This ensures the buyers always buy at the lowest ask price, and the sellers sell at the highest bid price.