Introduction
If you are looking to invest or trade with cryptocurrencies, you may have come across the terms, ‘bid’ and ‘ask.’ For a newcomer, these terms can be complicated. We take a look at the terms below so you can trade with more confidence. The terms ‘bid’ and ‘ask’ can sometimes be phrased as ‘bid and offer’. A ‘bid’ price represents the maximum price that a buyer is willing to pay for an asset. The ‘ask’ price represents the minimum price that a seller is willing to receive. Once the buyer and seller have agreed on a price for an asset, the transaction can be completed.
Bid/ask spread
A regular trader contends with the bid and ask spread that serves as the implied cost of trading an asset. For example, you may be looking at the markets and notice that the current market price of Bitcoin is $4,000/ $4,100. If you want to buy Bitcoin, for example, you will need to place a bid at the current market price of $4,100. The seller wants to sell at the current market price and would receive $4,000.
What is the point of a bid/ask spread?
The bid/ask spread typically works in favour of the markets/exchanges. In the example above, it may look as if there is a $100 discrepancy between the price you are paying and the price the seller is receiving. Yet, this isn’t actually a discrepancy at all. In fact, it represents the profit received by the owner/creator of the platform you are making the exchange on. Bid/ask spreads will usually differ from platform to platform.
Will the bid/ask spread always be the same?
The short answer is no. The bid/ask spread could change dramatically through periods of low liquidity or market turmoil. This is a result of traders/investors not willing to pay a price beyond a certain threshold. The same goes for sellers who may not want to sell for a price below their desired one.
A seller, for example, may want $4,000 for their Bitcoin even though the market is stipulated at $3,700. Naturally, buyers might offer the market price but sellers would face a loss. In this scenario, sellers will often choose to hold their assets rather than sell them. The reverse could also happen. If someone has paid $4,000 for their asset, they might be looking to sell at $4,200 to record a profit. But if the market price is stipulated at $4,000, they may choose to hold until there is an opportunity to sell at greater profit.
Definitions
- Bid: An order listed on the ‘buy’ side of the order book.
- Ask: An order listed on the ‘sell’ side of the order book.
- Bid/Ask Spread: The difference between the highest bid and the lowest ask on the order book.
- Bid/Ask Depth: Represents the cumulative volume of buy and sell orders at a set price. The bid depth is the cumulative volume of current ‘buy’ orders at the price or higher. The ask depth is the cumulative volume of ‘sell’ orders at that price or lower.
What to remember
Typically, the ‘ask’ price is always going to be higher than the ‘bid’ price. The difference between these two figures is dubbed as the ‘spread,’ which is the profit the platform will receive for hosting the trades. A wider spread would, more often than not, result in lower profit rates. This is a product of an asset being purchased at the higher end of the spread, whilst being sold at the lower end.
Markets, exchanges and platforms will use different spreads to account for transaction costs, the value of a single asset, and overall liquidity. Spreads can change drastically due to the volatility of the cryptocurrency market. Expect initial compromises by the seller. If there are several different traders/investors interested in a seller’s asset, the seller may begin by compromising to a lower price. This is often to encourage a bidding war.
Once multiple buyers have placed their bids, they will incrementally increase the bids to compete with each other. This competition will carry on until only one buyer is left. This is beneficial to the seller since it adds additional pressure to buyers and price is driven upwards.
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Disclaimer: The views and opinions expressed by the author should not be considered as financial advice. We do not give advice on financial products.