Decentralized finance (DeFi) has been on the rise since its inception and has created a pool of ways to solve problems and bring decentralization into the traditional finance (TraFi) world. The Crypto Order Book model is part of this innovation, which helps to remove delays in carrying out trades by matching buy and sell orders.
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Crypto Order Book Explained
Almost every exchange uses an order book to organize an electronic list of buy and sell orders for various commodities, such as cryptocurrencies, stocks, bonds, currencies, and so on, organized by price level. Buy and sell information may appear at the top and bottom of the screen or on the left and right sides.
The order book assists traders in making better trading decisions. They can see which brokerages are buying and selling stock and determine whether the market is being driven by retail or institutional investors.
The order book also displays order imbalances, which can provide information about a stock’s direction in the short term. These lists contribute to market transparency by providing information on price, availability, trade depth, and who initiates transactions.
What is Order Book in Crypto?
An order book is a list of buy and sell orders happening in real time on an exchange. The concept behind the order book is to match both buyers and sellers. So let’s assume you want to buy crypto at a particular rate. The crypto order book model strategy entails that it matches you with someone that will like to sell his/her crypto at that same rate.
For example, if you place a limit order, also known as a pending order, to buy Ethereum (ETH) for $1,000 USD, someone else on the exchange must agree to sell Ethereum (ETH) for the same price.
Placing an order does not guarantee that another person will accept your order. If someone else on the exchange places a better order than you, that order will be filled first. Crypto exchange algorithms are programmed to accept the best available buy or sell orders, ensuring that customers do not unintentionally accept a lower price than the best available.
Bid Order vs Ask Order
For every crypto asset traded, there is a buyer, a seller, and a “Bid” and “Ask” price. The term “Bid” refers to the highest price a buyer will pay to buy a specific amount of crypto at any given time. While the term “Ask” refers to the lowest price at which a seller will sell the crypto.
The difference between the highest buying price and the lowest selling price is called “Spread.” The Spread represents the difference between the bid and ask prices and is dependent on the volume of trades submitted. For example, if there is a large volume of open orders in an order book, the Spread will be thinner, and vice versa.
How Order Book works
An order book, in general, provides a streamlined view of a specific asset by recording buy and sell orders. Platforms that use electronic order books use a matching engine to sort and fulfill buy and sell orders automatically.
An order book contains various key pieces of information about an asset. First, there are separate sections for buyers and sellers, as well as a bid and ask section. When dealing with order books on an exchange, you can either place a limit order (i.e., a pending order) that will “sit” in the order book until someone else takes it, or you can immediately take someone else’s limit order that is already “sitting” on the order book.
A “Market Size” or “Cumulative Quantity” will be displayed for each price level. This is the amount of cryptocurrency that is willing to be purchased or sold at a given price.
How to read Order Book Crypto
The order book API consists of the following order book types, which include: Buy orders, Sell orders, and Market order history.
- Buy orders: contain buyer information including all the bid prices, i.e. the amount investors are willing to pay to purchase their desired asset.
- Sell orders: are similar to buy orders, but they also contain all of the offers (or asking prices) or where people are willing to sell.
- Market order history: shows all the transactions that have taken place in the past.
The highest bid and lowest ask prices are displayed at the top of the book. These indicate the dominant market and price at which an order must be executed. Bids are on the left side of the book, while asks are on the right. Various traders have provided buy and sell prices to both sides. Bids are typically represented by a green color, whereas asks are typically represented by a red color.
The book is often accompanied by a crypto order book chart (candlestick chart), which provides useful information about the current and past state of the market (i.e. market history). The order book helps traders make more informed trading decisions like the best time to enter the market.
For traders looking to leverage the order book model, you need to know when to enter and exit a market to get the best possible ask and bid price for a particular trading pair. It can reveal both the depth of trades information, giving you indications of the best price to enter the market.