What are the differences between crypto bid and ask price? You should have come across terms like ‘bid’ and ‘ask’ while investing or trading with cryptocurrencies.
And, if you are a beginner, it is quite natural that you may have wondered what these two terms really mean and how they differ from one another.
Ideally, these two terms, ‘bid’ and ‘ask,’ may sometimes be referred to as ‘bid’ and ‘offer’ as well.
In simple words, a ‘bid’ represents the maximum price at which a person is willing to buy a crypto asset.
On the other hand, an ‘ask’ is the minimum price at which a seller is willing to sell off that particular asset.
When these two prices are agreed upon mutually, a transaction for that asset can be completed.
Yes, for a newcomer, these two terms may seem pretty confusing and complicated, but not anymore.
This article will take a look at these terms and let you know about the differences between them so that you can trade with more confidence henceforth.
Contents
7 Differences Between Crypto Bid and Ask Price
The crypto trading market is as busy as any other financial market such as futures, forex, stocks, and options.
Also, similar actions are performed in this market when it comes to updating the price of assets in real-time and trading crypto assets.
Two of the most important terms related to the price of crypto assets are the bid price and the ask price that all crypto traders and investors should be updated with.
Since there are quite some differences between the two terms, articles like this are quite helpful.
1. Definition
Going by the definitions of each of these two terms, the bid price refers to the highest Buy Order or the maximum price offered for a crypto asset. It is offered by the prospective buyer or buyers.
In contrast, the ask price refers to the lowest Sell Order or the minimum price that is prevailing in the market for a particular crypto asset. This price is offered by the seller or sellers.
2. Representation
In terms of representation, the bid price represents the price tag of the first order to purchase a crypto asset from the Order Book on a particular crypto exchange.
On the other hand, the ask prices represent the cost of the first selling order of the assets from the Order Book.
3. Positions
In the world of crypto, whether it is Binance or any other crypto exchange, all depend on the Buy Order prices from the Order Book particularly when a crypto trader sells off their tokens in holding to close a Long Position.
In that case, you should use the bid prices when the crypto asset is growing along with ‘Take Profit.’
On the other hand, when it comes to Sell Orders, the crypto exchanges also take them from the Order Book but when a trader buys the tokens in order to close a Short Position.
In this particular situation, you should consider the ask price while closing in order to Take Profit when the price of the particular crypto coin falls.
4. Conditional Orders
In terms of Conditional Orders, the bid-ask rule seems to work the other way around. When it comes to buying crypto tokens, the traders usually use the ask price of the particular crypto asset they want to buy.
In contrast, when it comes to selling tokens in conditional order, it is the bid price that is often used by the traders.
5. Effects of Demand
There are different effects caused by and on the bid price and the ask price when other factors are considered. For example, the highest price that a buyer is willing to pay for a particular crypto asset is actually the price of the exchange.
This price increases whenever there is an increase in the demand for a specific crypto asset. Also, the daily trading volume on a crypto exchange affects the bid price directly.
On the other hand, the ask price is the lowest price a seller is willing to accept for a particular crypto asset. It is the lowest price offered by most of the crypto exchanges currently.
This price typically follows the demand-supply principle and is directly proportional to each other. This means that when the demand for a particular crypto coin decreases, the ask price also decreases consequently.
6. Tracking
When it comes to tracking the bid price, it is usually done determining the first buy order that is in the Order Book.
When the price of the particular crypto coin begins to grow, the first order in the Order Book, which is the bid price, also grows and so does the ask price. This results in active buying wherein your ‘Take Profit’ is pending.
On the other hand, when you want to track the ask price, it is done by determining the first sell order in the Order Book.
The ask price of the first order in the Order Book grows along with the bid price and when the price of the specific crypto token begins to grow, there is an active buying (or selling) and your Take Profit becomes pending.
7. Over and Under Quotes Effects
Usually, crypto assets are sold at a price that is below the bid price and never higher than that. Though this bid price is strictly a matter of the buyers and is left to their discretion, if and when it goes way out and above the market standards, the price is adjusted.
Ideally, when the ask price is considered, it is affected by even the slightest of movements that may be noticed in the daily trading volume on an exchange and it all depends on the most recent successful transaction.
Since the ask price is actually the lowest price a seller offers, a product can only be sold at that price or above and never below it.
In this case, if the seller has the freedom to quote a price but if it is over and above the current market standard, there will be no takers.
Which is Better – Crypto Bid or Ask Price?
In order to determine which among the bid price and ask price is better, you will first need to understand these two terms very clearly.
Typically, bid price and ask price are two very important concepts but sadly most crypto investors and traders overlook them. They eventually end up buying or selling a crypto product at a loss.
Ideally, the bid price signifies the demand for a particular product and the ask price signifies the supply of it.
Here are a few facts summarized from the above for you to know about the ask price:
- Most of the crypto exchanges quote the lowest ask prices offered by them currently as their selling price.
- As and when the demand for a crypto coin decreases the ask price will also decrease simultaneously.
- The ask price depends on the daily trading volume of the exchange.
- Most of the time the ask price of a particular crypto coin matches with the ask price of the last sale made successfully on the exchange.
- A crypto product can be sold at a price that is higher than the ask price but never below it.
The sellers here are free to quote a price to their liking but it should be well within and according to the norms of the existing market, otherwise no one will respond to it.
As for the bid price, most of its attributes are the same as the ask price but the most significant differences that can be summarized are as follows:
- It is the maximum price the crypto exchange offers currently at which a crypto trader can buy a product.
- It increases as the demand for the product increases since it is also linked with the daily trading volume of the crypto exchange.
- It usually matches the last successful sale made on the exchange.
- A crypto product can be bought at a price lower than the bid price but never higher than that.
Once again, the buyers are free to set any bid price but if it is too low as compared to the current market price, it will be adjusted to make it useful.
Typically, both bid and ask prices refer to the best possible potential price of a crypto asset. However, the bid price relates to buying the asset while the ask price relates to selling off the same.
These are the prices at which people are willing to transact in the marketplace at any given point in time.
All these prices and their differences can be seen during trading in the Order Book itself against any given crypto trading pair. The bid price is usually below the present price and the ask price is above the current price.
The differences in prices in this aspect are significantly noticeable when a small volume and a one-minute timeframe of a coin are considered.
With all these facts and info about the mechanism involved in the bid and ask price now known to you, it is quite easy to understand that according to the fundamental principle the ask price is better suited for ‘stop loss’ whereas the bid price is more useful for ‘take profit.’
However, there may be a few exceptions to this. For example, when you put stop loss on the ask price and the price of the particular crypto coin falls and nears the stop loss.
If the ask price is above the stop loss a large sell is initiated when the bid price reaches or even goes below that.
In such a situation, the price of the crypto coin reverses and as a result moves upward. You will be lucky in this case and make a profit because the stop loss did not work and the ask price went in the upward direction to give you profits.
However, if you put an ask price and a lower stop loss and when the price of the crypto coin falls, this time it may not unfold and fall further.
The bid price of the coin will by now be less than the stop loss, when the first sale is completed in such a situation, resulting in a loss.
There is a chance of being out of the market ahead of time even after choosing a bid price and by an ask price chosen, you can even incur big losses in stop loss.
Therefore, it is elementary that you make your choice between them based on a few specific factors such as the:
- Trading strategy
- Risk tolerance
- Money management ability and
- Preferences.
However, if you follow the experts in the crypto market and if you are a professional trader, you should choose a bid price to make a profit.
This is because the profit may be low if another trader makes a big purchase and at the same time the price of the order book increases since, as per the rule, your order will be closed by the order book.
The difference between the ask price and the bid price is called ‘spread’ or ‘bid-ask spread.’ This spread is related to the overall liquidity of the crypto market. This relation is established due to the interaction between the market makers and price takers.
The bid price and the ask price both play a significant role not only in helping the crypto traders and investors in their endeavors but also helps the crypto exchanges, platforms and the market at large to create and use different spreads.
This helps in several things such as accounting for:
- The value of a particular crypto asset
- The cost for making a transaction and
- The overall liquidity.
Another good thing about the bid-ask spreads is that when you compare different spreads of different currency pairs of several exchanges, you will get some valuable insights regarding the individual market conditions and the mechanism of their microstructures.
This may not be possible or observable immediately and clearly from the available trade data.
And, since these spreads can vary radically due to the volatility of the crypto market, sellers are expected to make initial compromises with the ask price.
This is because there may be several investors and traders who may be interested in the particular crypto asset that the seller wants to put up for sale.
This situation often results in a bidding war wherein multiple buyers place their bids. Such incremental increase results further in a tough competition which continues till there is only a single buyer left.
This is significantly advantageous for the seller since it drives the price of the particular crypto asset higher up due to the additional pressure put on the buyers.
Therefore, in the end, it can be said that there is nothing really called ‘better’ between the bid price and ask price since both come with their significant pros and cons.
These can vary depending on the particular situation and market condition at a particular point in time.
Conclusion
Ask and bid prices are useful as they reveal a lot about the volatility and liquidity of an individual crypto market and the exchange with the spreads. Now with the differences known to you, it will help you to choose a market you should trade on.
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