How are cryptocurrency prices determined?
Summary
This article explains how supply and demand determine prices on Bitvavo. It covers essential terms like bid/ask price, spread, and slippage, and explains how liquidity levels affect the execution of your Price Guarantee orders.
Understanding price formation
Bitvavo brings buyers and sellers of digital currencies together. Supply and demand determine the prices at which digital currencies are traded. Every time market conditions change, the indicative price may change due to exchange rate fluctuations. To ensure you see the most recent price, the platform updates constantly.
The following terms are essential to understanding your trade execution:
The bid price is the price the best buyer (the highest bidder) is currently willing to pay. It indicates both the price they want to pay and the amount of digital currency they want to buy at that price.
The ask price is the price the best seller (the lowest seller) is currently willing to accept. It indicates both the price they want to receive and the amount of digital currency they want to sell.
The market price is the indicative price displayed on the Bitvavo platform. It is based on the average of the best bid price and the best ask price. Note that the actual price you pay (buy) or receive (sell) will almost always differ slightly from this indicative average.
The spread is the gap between the best bid price and the best ask price at a specific moment.
Spread with Price Guarantee:
When you trade on Bitvavo, you use our Price Guarantee. We take on the market risk for a set period (e.g. 5 seconds) to ensure you receive the exact amount shown. To cover this risk and unforeseen price fluctuations, a spread is included in the price quote.
Slippage occurs when there is not enough volume (liquidity) at the best price to fill your entire order.
Instead of filling at a single price, your order "consumes" the available amount at the best price and then moves (slips) to the next available prices in the underlying market to complete the trade. This results in an average execution price that is less favourable than the initial market price. This is common with large orders in less liquid markets.
Volume is the total value of all trades executed in a specific timeframe.
Liquidity refers to how easily an asset can be bought or sold without impacting its price. High liquidity means there are enough orders in the underlying market to fill trades quickly at stable prices. Low liquidity can lead to higher spreads and slippage.
1. Example: Liquid market
In a healthy, liquid market, the difference between buy and sell prices is small.
- Market price: £1 for 1 BTC
- Underlying market: Next buy at £1.0001 | Next sell at £0.9999
- Result: Spread and slippage are minimal (below 0.75%).
Trading fees are standard (max 0.25%). The final purchase price is very close to the indicative price.
2. Spread and slippage in a semi-liquid market
If executing your order would result in a price difference of more than 0.75% from the indicative price, Bitvavo shows a warning. This difference does not go to Bitvavo; it is a cost caused by market conditions.
Spread warning
- Scenario: The gap between the best buy and sell orders is wide.
- Result: You may pay significantly more than the current market price shown on the dashboard.
Spread of over 0.75% is detected. As a result, you may end up paying more than expected.
Slippage warning
- Scenario: Your order size is too large for the available volume in the underlying market.
- Result: Your order will "slip" through multiple price levels, driving up the average cost.
This order size results in slippage of over 1.5%. To avoid unfavourable pricing, consider splitting your order into several smaller amounts.
3. Spread and slippage in an illiquid market
To protect you from excessive losses, Bitvavo blocks orders if the estimated price difference exceeds 2%.
If you see this warning, we recommend entering a smaller amount to avoid going too deep into the underlying market liquidity.
Spread block
- Scenario: The market is highly illiquid or volatile.
- Result: Trading is temporarily disabled to prevent instant loss.
Spread of over 2% is detected. To continue and avoid unfavourable pricing, try again with a smaller amount.
Slippage block
- Scenario: A very large order is placed in a thin market.
- Result: The order would cause the price to slip by more than 2%.
This order size results in slippage of over 4%. To continue and avoid unfavourable pricing, split your order into several smaller amounts.
Why is the price in the chart different from my execution price?
The prices shown in your Portfolio chart are averages over time intervals. They may not capture the exact moment your trade executed.
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