Beginner’s Guide to Bitcoin Exchanges

Many investors who are new to cryptocurrencies are also new to exchanges in general. In this guide, we’ll walk through market orders, limit orders, stop orders, and different charts that you’ll see on Bitcoin exchanges.

Reading the Order Book

In order to learn how an exchange works, we need to learn how to read the order book.

This is a snapshot of the GDAX order book. The order book is made up of limit orders that traders have placed. If you place a limit order, you are a “maker”. Your order helps to build the order book and does not execute instantly. If you want your order to automatically execute, you will place a market order. When you place a market order, you are a “taker”. Your market order will execute at the best price, getting matched with a limit order and removing it from the book. For the convenience of placing a market order, you will pay a 0.25% fee on GDAX. Limit orders have no fees. GDAX does not charge fees for limit “maker” orders because they help build the book, add liquidity, and contribute to a more stable market.

The leftmost column of the order book, “Market Size”, simply indicates how many BTC can be bought or sold at a given price.

Say you want to place a market buy order for 10 BTC. Your order would automatically execute, and you’d start to buy out the posted limit sell orders (in orange). First, your order would buy the 0.2649 BTC limit sell order @ $11,364.24, then the 0.05 BTC limit sell order @ $11,364.24 and so on until you fill your order of 10 BTC. You may notice that all of the sell orders in this screen shot are for small quantities of Bitcoin. This means you would drive the price of Bitcoin up quite a bit if you placed a 10 BTC buy order. If fact, your 10 BTC buy order would “eat up” all of the orders shown on the screen shot, as they add up to 3.8 BTC. Your single order would drive the price from $11,364.24 to beyond $11,380.

GDAX also includes a “My Size” column which conveniently shows any open orders you have on the order book.

If you want to better visualize market size, you can look at the “Market Depth”. This chart visualizes all maker orders on the order book. This chart will directly tell you how many BTC you can buy or sell at a given price or for a given amount of USD.

The market depth chart shows the last traded price at the top ($11,221.81). If you hover your mouse over the chart, it will tell you how many BTC can be bought/sold for that price. In this example, if you placed a market buy for $1 million, you’d buy 91.7 BTC. You would move the price up to $11,268 (.4%) in the process.

Notice there are some steep sections, particularly on the sell side. These are called “sell walls”. These are large quantities of maker sell orders, usually at an “important” number. You’ll typically see large walls at $5,000, $10,000, etc. This gives the impression that a large volume of buy orders are needed to lift the price past that point. These walls can move at any time, however, as they are built up by maker orders that can be removed at any time before they execute.

Stop Orders

A stop order is a market order that executes when a certain price is reached. If there is a large sell wall at $12,000, and you think the price of Bitcoin will rise substantially once it breaks though, you may want to consider a stop-buy at $12,000.01. If the price of Bitcoin never hits $12,000.01, your order will not execute. If the price does hit $12,000.01, your order will execute at the next best price. If there are other people with the same idea, there may be a lot of stop order buys queued for execution. The exchange knows how many stop orders are queued for execution, but you may not be able to see this.

Often, the book is very “thin” above the sell wall price. This means there are not many maker-limit sell orders on the book at $12,001, $12,002, $12,003, etc. So, when your stop buy gets triggered at $12,000.01, it may be sitting behind many more orders trying to execute at best price (market). If there aren’t many sell orders on the book, your stop buy may end up executing at a price other than $12,000.01. Your buy may end up executing at, say, $12,075. There is often a large price movement in short order after sell walls or buy walls are taken out.

While not a perfect example, the above screenshot shows a sell wall at $11,260. To move the price from $11,260 to $11,260.01, 50+ BTC need to be bought. If another 50 BTC are bought, however, the price will move well past $11,290 and off of this chart.

Limit-Taker Orders

We’ve established the following:

Maker orders: build the order book and do not execute instantly

Taker orders: instantly execute at best price

Market orders: instantly execute at best price

It turns out that limit orders can serve both maker and taker functions. A limit-maker order builds the book and places an order at an exact price, as discussed above. Until recently, this was the only type of limit order allowed on GDAX.

Maker-limit orders are sometimes known as “post only”. During times of crazy volatility, some exchanges even use a “post only” mode where market orders are not allowed until the book is built. This happened shortly after Bitcoin Cash (BCH) was launched on Coinbase.

Recently, GDAX added limit orders that “allow taker”. Depending on the price you set, the order can execute instantly, like a market order, and you will pay a fee. How is this different than a market order? Well, you will never pay more than the price that you’ve entered.

In this example, you want to buy 150 BTC for a price $13K or under. If any Bitcoin are for sale below $13K, you want to auto execute. However, you do not want to buy any Bitcoin priced above $13K. Here, you want a taker-limit order. When executed your order would consume all of the sells shown on this screen. What would happen if there were no sell orders between $11,186.87 and $13,000? Well, if you placed a market order, you would buy 15 BTC regardless of the price. With a limit-taker order, you’d only buy the 40 or so BTC listed for sale on this book, and your remaining 110 BTC buy would be placed as a limit-maker order @ $13,000.

This example may seem far-fetched, but some order books are very thin, especially for small market capitalization altcoins. For this reason, exchanges like Bittrex often do not allow market orders, but instead use the hybrid limit-taker order, which they simply refer to as a limit order.

Here’s an example sell book for a coin called “Breakout Stake” (BRX) on a popular altcoin exchange, Bittrex.

If you bought just 1 BTC worth of BRX, you’d eat up all of the sell orders shown here and drive the price from .000139 BTC to .000142 BTC, over 2%. If you were careless and placed a market order without checking the sell book, you could substantially drive up the price of the coin.

If you want your order to execute automatically, but want to limit how much you drive the price, you can enter a buy order at .0001395 BTC. If your order doesn’t fully execute, the remainder will stand as an open order on the book at .0001395 BTC.

There are no stop orders on Bittrex. Some altcoin exchanges may allow for stop orders, but not many do. This is because there is already low liquidity on these exchanges/coins and they want to encourage traders to build the books.

Risks and Opportunities for Stop Orders

Stop orders may seem like guaranteed protection against downside, but they can also be dangerous. These types of orders can also provide opportunities, however.

On GDAX, by default you do not have the option to set a limit price on your stop orders. Instead, your order executes instantly at market when your stop price is reached. There is no price guarantee for your sell order, which could be very dangerous in a flash crash. Flash crashes occur when large BTC holders (known as “whales”) sell a lot of BTC all at once through a market/taker order. The end up eating up the entire buy book and trigger other people’s stop loss sells along the way. This can drive the price as low as $.01 momentarily.

If you have stop sells in during a flash crash, you may end up selling your BTC for next to nothing. Alternatively, if you place low limit buy orders you may pick up some cheap BTC during a flash crash. For this reason, it makes sense to keep some standing limit buy orders on BTC and alt coins in order to benefit from a flash crash. For example, put in an order for 100 BTC @ $.10. If the price of Bitcoin were to crash to a penny, you’d be able to pick up 100 BTC for $10. Think this is crazy? Well, it happens. GDAX and other exchanges are working hard to build books/keep servers up so that flash crashes do not happen in the future. However, flash crashes can and will still happen, as evidenced by even very liquid markets like the NASDAQ.

Stop Limit Orders

Perhaps in response to flash-crash liquidations, GDAX has added a stop-limit function. To access this trade, click “advanced” under the stop order menu.

For this order, if the price of Bitcoin hits $9,999 your sell would execute at market, unless there are no standing buy orders above $9,000. In this case, your sell would be placed as a $9,000 limit-maker sell order.

Conclusion

This has been a quick introduction to cryptocurrency exchange functions. There are many more functions unique to certain exchanges. Looking for more information or trading tips? Contact Us to set up a one-on-one consultation.

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