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 market 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 new orders are placed in the order book, 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 use the Price Guarantee, you trade directly against Bitvavo. 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. If you prefer to pay 0% spread and trade directly with other users, we recommend using a limit order.
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 order book to complete the trade. This results in an average execution price that is less favorable than the initial market price. This is common with large market 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 book 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 euro for 1 BTC
- Order Book: 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 at the top of the order book.
- 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 unfavorable 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 market orders if the estimated price difference exceeds 2%.
If you see this warning, you have two options:
- Enter a smaller amount to avoid going too deep into the order book.
- Use a limit order to specify the exact price you are willing to pay.
Spread block
- Scenario: The market is highly illiquid or volatile.
- Result: Market orders are disabled to prevent instant loss.
Spread of over 2% is detected. To continue and avoid unfavorable pricing, place a limit order instead.
Slippage block
- Scenario: A very large order is placed in a thin order book.
- 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 unfavorable pricing, place a limit order or 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. For a precise view of price movements, high/lows, and market history, we recommend using the candlestick chart (Advanced view).
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