What is the BID and ASK price in crypto trading?

The cryptocurrency market operates on the basic concept of demand and supply. This concept is what affects the prices of cryptocurrency assets. Essentially, buyers and sellers interact with each other to exchange digital assets. The mainstay of these interactions is the bid and ask price in crypto trading.

The bid and ask prices determine how every trade goes. They are the terms of each trade. In cryptocurrency trading, these concepts are necessary for making well-informed decisions concerning a trade. Therefore, understanding the bid and ask price in cryptocurrency is understanding the fundamental mechanics of how assets are bought and sold in the market.
That is why in this article we will be exploring this concept and learning strategies that can actively manage bid and ask price in crypto trading.

Let’s dive in!

Bid and ask price in crypto trading: a comparison.

The bid price is the highest amount a buyer is willing to pay for a cryptocurrency at a given time. The highest price that someone is willing to buy crypto at is known as the “best bid“. This best bid price guarantees the highest possible price for any seller at that particular time.

Conversely, the ask price (or offer price) is the lowest price a seller is willing to accept for a cryptocurrency. Similarly, the lowest possible price someone is willing to sell is called the “best ask” or “best offer”. This best ask price guarantees the lowest possible price for any buyer at that particular time.

Comparatively, in crypto trading the bid and ask, is a two-way price quotation that indicates the best potential price that a certain amount of cryptocurrency asset can be bought and sold at a particular time. For example, if the bid and ask price for an asset is $10.50/$9.00, the bid price is the first of the pair while the ask price is the second.

The difference between the bid and ask price is known as “bid-ask spread” or simply, “spread”. In a volatile market, for example, the crypto market, the spread can be calculated as the weighted average spread that includes orders at different price levels. The spread is a key indicator of the liquidity of the asset. Therefore, the smaller the spread, the greater the liquidity of the crypto asset.

Factors that affect bid and ask price in crypto trading

The bid-ask spread mirrors what is happening to the bid and ask price. Therefore, factors that affect the bid and ask spread directly affect the bid and ask price. The bid-ask spread in the crypto market is under the influence of several factors. These factors include:

Market liquidity

As stated earlier, the liquidity of a particular asset is indicated by the bid-ask spread. Therefore, highly liquid assets like Bitcoin and Ethereum typically have narrow spreads. This is because, with highly liquid assets, more buyers and sellers are willing to trade at or near the current market price. Recent data shows that the average spread for Bitcoin is 0.02% which is an indication of its high liquidity.

Trading volume

Similar to liquidity, assets with a higher trading volume have narrower spreads. This is a result of the increase in the number of traders buying and selling at a particular price. In addition, a higher trading volume enhances market efficiency and reduces transactional costs.

Volatility

A higher volatility widens the spread, because traders start to feel skeptical about an asset’s value.

Time of the day

Bid-ask spread may vary during a trading day. During busy trading days, the spread may widen due to the price fluctuations of an asset. Furthermore, external factors occurring during a trading day, such as a press release or asset news, may also affect the spread.

Market depth of an asset

The market depth is the number of buy and sell orders at various prices that the asset gets. A market with a good depth will generally have a narrow spread. The depth of the market is also related to the asset class which is the different levels of liquidity and volatility of different assets. Typically, assets owned by established companies have more liquidity and are fairly stable, as a result, they have good market depths. Such assets have narrow spreads.

Strategies to manage bid and ask price in crypto trading

Understanding bid and ask price is necessary for every crypto trader. However, there are effective strategies that should be employed to manage the spread and stay ahead of the game. Here are some of these strategies.

1. Setting limit orders: by setting limit orders, traders indicate the specific price they want to buy or sell for. This allows them to control the bid and ask price and benefit from the spread.
2. Monitoring market conditions: the cryptocurrency market is affected by several factors. However, monitoring the activities of the liquidity and volatility of assets in the market can help traders know when to enter or exit trades. This helps to reduce the impact of unfavorable spreads.
3. Using trading bots: trading bots are AI-powered, automated systems that can help traders manage and make trades. Just like the crypto trading bot, they assess market conditions and compare the current conditions with historical data to accurately predict the direction of a trade. Using trading bots helps traders take advantage of narrow spreads.
4. Choosing the right assets: assets with high liquidity and low volatility have narrow spreads which are more favorable. On the other hand, assets with low liquidity and high volatility have wider spreads which are not favorable.

Conclusion

The bid and ask price in crypto trading is a fundamental concept for an effective trading experience. They reflect the liquidity and volatility of an asset with the spread. Therefore, understanding this concept will help in making well-informed decisions and implementing appropriate strategies thereby improving trading outcomes.

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