Bid vs Ask Price: What is it and How Does it Work?
If you’ve ever bought a car or gone to a yard sale, you already understand bid vs ask prices at a basic level. If someone wants to sell a used car for $1,000 and you want to buy it for $900, the $100 difference is called the spread. $1,000 represents the asking price, and $900 represents the bid price, or what we might think of as an offer. Bid vs ask price comes up often in crypto trading, particularly when using advanced trading platforms.
In this guide, we’ll explain bid-ask spreads and how they work in crypto trading. We’ll also discuss order books, which are constantly updated lists of orders used on crypto exchanges. Order books are the source of bid and ask prices. Let’s dig in.
Summary: What is Bid vs Ask Price?
Ever wondered what the two prices on an order book are? Bid prices are offers to buy at a fixed price at or below the current price. Ask prices are offers to sell at or above the current price. Both bid and ask prices come from limit orders traders place on crypto exchanges.
However, when placing an order on a crypto exchange, you have the option to place a market order rather than a fixed-price limit order. A market order fills from the existing limit orders on the exchange. In effect, you’re accepting the offer from other traders. A market sell offer accepts the bid price, and a market buy order accepts the ask price.
What is an Order Book?
Exchanges track limit orders in an order book. In short, an order book is a record of all open buy and sell orders for a given trading pair on the exchange. Let’s look at the BTC/USD order book from Coinbase to understand how the numbers interact.
- Ask Price: The order book tracks open limit sell orders at or above the current price.
- Spread: The spread is the difference between the ask vs bid price.
- Bid Price: The order book also tracks open limit buy orders at or below the current price.
If you placed a market buy order for 0.0015 BTC, about $95 at the current price, the order would fill from the first two limit sell orders in the order book. The first sell order has an ask price of $63151.66 and makes 0.00126524 BTC available. That’s not enough to fill the market order, so the remainder slips into the next limit sell order, which makes 0.00046311 BTC available at one penny higher than the first sell order.
This price change is called slippage, which means you get less than expected for the trade based on the market makers current price.
What is a Bid?
Bids are limit buy orders. Let’s say you want to buy BTC but want it at a specific price. The price you enter on your buy order is the your “bid,” although any other orders with a higher price will execute before yours. A bid price is the highest price a buyer is willing to pay for a cryptocurrency. However, if someone needs to sell with a market order, the bid price is also the best price at which a seller can sell immediately.
Bid Price Example
Let’s look at an example of a BTC buy order. The current ask price is $63,004.33. The short-term price chart seems a little soft, and you think you can get BTC for a bit less. You change the limit buy price to $62,284.67, as shown below.
This bid price won’t even be visible in the order book without scrolling, but it’s also not unusual to see Bitcoin’s price fluctuate by greater amounts throughout the day. If the current market price reaches your bid price and there is enough selling to fill the buy orders before yours (as well as yours), your order will be used to fill sell orders. If not, your order won’t fill.
What is an Ask?
Ask prices are the opposite of bid prices. When a seller places a limit order at or above the current price, that order is added to the order book, with the lowest ask prices first in line. The ask is the lowest price a seller is willing to accept for a cryptocurrency. However, when someone places a market buy, the ask price is also the best price at which a buyer can purchase immediately.
Ask Price Example
Let’s look at an example of an ask price for BTC/USD. In the trade below, we set the ask at 1% above the current price. When the market reaches $64,454.39, the order will be used. However, other buyers and sellers can jump in line with a lower ask price. This moves the limit order with the higher ask further up in the order book.
What is the Bid-Ask Spread?
The bid-ask spread refers to the price difference between the bid and ask prices. This amount often grows wider during times when market liquidity is lower, meaning there are fewer traders or smaller amounts offered for trades. The best time to trade crypto tends to coincide with business hours in the US. Spreads generally tighten, and oftentimes, even BTC – currently trading above $64,000 – sees spreads as small as a penny, as shown above. In other cases, you might see spreads of a few dollars, as shown below.
Spreads become a consideration when using market orders because buyers pay more and sellers get less. However, spreads also matter when using limit orders. You can use spreads to jump in line with a bid or ask positioned within the spread.
You may also see crypto exchanges refer to a spread on basic trades, such as Coinbase’s Simple Trades or Binance’s Instant Buy. In this case, the spread refers to a markup the exchange uses to lock in a price quote for point-and-click trades.
What Causes Bid-Ask Spread Fluctuations?
While writing this, BTC/USD spreads have ranged from $0.01 to more than $6. Spreads can fluctuate for several reasons, although the likely culprits in this case may have been market volatility combined with changes in both demand and liquidity. Let’s explore some of the key reasons spreads shrink or widen.
- Volatility: Crypto’s volatility offers exceptional trading opportunities, but it also sometimes contributes to wider spreads. Uncertainty about the short-term price direction often creates distance between bid and ask prices.
- Trading Volume: Smaller exchanges often see wider spreads, even on popular cryptocurrencies like Bitcoin and Ethereum.
- Type of Crypto: Less common cryptocurrencies may see wider spreads as well. In this case, fewer market participants push bid vs ask prices further apart.
- Time of Day: You’ll often find narrower spreads during business hours in the US. Conversely, weekends see fewer trades from big-money players, often leading to wider spreads.
- Liquidity: Leading cryptocurrencies enjoy higher liquidity, which is the ability to convert to another asset without a loss of value. Higher liquidity typically reduces spreads and allows more efficient trades.
- Market Uncertainty: During periods of market uncertainty due to news or macroeconomic events, spreads often widen.
- Order Mix: Market orders fill from the order book, whereas limit orders populate the order book. Exchanges that set market order fees close to limit order trading fees may have fewer limit orders, causing wider spreads.
Pros and Cons of Using Bid/Ask Prices (Market Orders)
Market orders are faster and easier, but are they always a good idea? Using market orders means you’re buying at the ask price or selling at the bid price. Let’s examine the pros and cons of using market orders with your crypto trading strategies.
Pros
- Instant order execution
- Easy order setup
- Often, there is little price difference when trading large-cap cryptos
- Well-suited to small trades
Cons
- Typically, they come with higher trading fees
- Trading prices may be less-than-ideal
- Can move markets when trading low-cap coins
- Can’t specify your preferred price
- Spreads or liquidity at the market price can change suddenly, causing more slippage
Market orders have their place in trading, such as when you need to trade quickly or if you’re trading small amounts. However, the higher fees and unpredictable execution prices make limit orders a better choice if you have the time.
Conclusion
Bid vs ask prices play an important role in crypto trading on advanced trading platforms. Understanding how bid prices relate to ask prices can help you plan your trades more efficiently. Although it’s easy to overlook, saving 1% on a long-term trade can turn into much more over time, particularly in crypto trading, where some assets see gains measured in thousands of percentage points.
FAQs
Should I buy at bid or ask price?
When you use a limit order to buy, you set your own bid price. Using market orders means you’re buying at the ask price, meaning the price of existing sell orders in the order book.
How much should you bid above the asking price?
When buying with a limit order, you should bid at or below the ask price. The ask is the price someone else is willing to sell for, whereas the bid is the buying offer. If you use a market order to buy, you’re automatically buying at the ask price set by the seller.
Can you profit from the bid-ask spread?
Yes. However, this is often difficult for retail traders to do without trading bots and indicators. Trades you enter, as spreads widen, can turn a profit when spreads tighten, although price direction may also change.
Why is bid-ask important?
Bid vs ask price describes two sides of a trading market. The bid represents the highest price someone is willing to pay for a cryptocurrency, whereas the ask represents the lowest price at which someone will sell. These prices can sometimes diverge significantly, meaning that a large bid-ask spread in a market order trade could result in higher slippage.
References
- Understanding slippage and spread (coinbase.com)
- Is There a ‘Best’ Time to Trade Crypto? Here’s What the Data Says (coindesk.com)
- Market Liquidity: Definitions and Implications (federalreserve.gov)
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