How are cryptocurrency prices determined?
How are cryptocurrency prices determined? How are cryptocurrency prices determined?

How are cryptocurrency prices determined?

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 (indicator) price may change. This is due to the fluctuation of the exchange rate. To ensure that you see the most recent price, it is necessary to keep updating the price. The following terms are essential:

Bid price

The bid price is the price that the best buyer (i.e. with the highest bid) is currently willing to pay to purchase a particular digital currency. The bid price indicates both the amount for which the user wants to buy the digital currency and how much digital currency the user wants to buy for that amount.

Ask price

The ask price is the price that the best seller (i.e. with the lowest selling price) is currently willing to receive for selling a particular digital currency. The ask price indicates the amount the user wants to sell the digital currency for and how much digital currency the user wants to sell for that amount.

Market price

The market price is the indicative price displayed by Bitvavo on its platform and is based on the average of the bid price and ask price. If you proceed to buy or sell a particular digital currency, this market price always differs (to a limited extent) from the actual price you pay (on a buy order) or receive (on a sell order).

Spread

The spread is the difference between the best bid price and the best ask price at a specific time of a given digital currency. See more explanations and examples later in this article. 

Slippage

If the price at which your order is executed does not match the price that was requested, slippage occurs. This occurs when the market moves to the detriment or advantage of your trade and the price originally entered is no longer available at the time the order is processed.

Volume  and liquidity

Volume represents the total of all orders executed. A market with low volume can lead to unhealthily low levels of supply and demand and low liquidity. Liquidity indicates how easy it is to trade a particular asset, without the trade having much impact on the price. When an asset is easy and quick to buy or sell, you can talk about high liquidity.

Important: If there is enough liquidity, you can trade relevant cryptocurrency for the best market price. 

Example liquid market

In this example:

  • Market price 1 euro for 1 BTC;
  • In the order book the next BTC is to be bought for 1.0001 euros;
  • In the order book the next BTC is to be sold for €0.9999;
  • The spread and slippage are below 0.75%. 

Trading costs are always a maximum of 0.25% per trade. The risk with a market order is that there is some spread cost, especially for digital currencies with lower trading volume. The spread ensures that the final purchase price may differ from the expected (indicative) price. This does not benefit Bitvavo.

 

Spread and slippage with a semi-liquid market

You will receive a notification about a semi-liquid market if the execution of your order, entered on the basic interface, would result in the final price you have to pay to be more than 0.75% different from the (indicative) price that was listed in your dashboard. This difference does not go to Bitvavo but arises because (in this case) the ask price is more than 0.75% higher than the market price.

Spread semi-liquid market

For this example is:

  • The market price 1 euro for 1 BTC;
  • In the order book the next BTC to be bought for 1.005 euros;
  • In the order book the next BTC to sell for 0.99 euros;
  • The spread is higher than 0.75%. 

The risk with a market order is that your order can only be filled at a price more than 0.75% off the indicator price. That's why below warning message is visible:

Beware, risk of unfavourable pricing 
Spread of over 1,5% for BTC is detected. As a result, you may end up paying more than expected. 

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Slippage semi-liquid market

In this example:

  • Market price 1 euro for 1 BTC;
  • In the order book the next BTC is to be bought for 1.01 euros;
  • In the order book the next BTC is to sell for 0.99 euros;
  • The slippage is between 0.75% and 2%. 

The risk with a large market order is that your order needs multiple buyers/sellers to be fully filled. The estimated slippage is between 0.75% and 2% and can be detrimental to the eventually filled order. That's why below warning message is visible:

Beware, risk of unfavourable pricing
This order size results in slippage of over 1,5%. To avoid unfavourable pricing, consider splitting your order into several smaller amounts. 

 

Spread and slippage on an illiquid market

You will receive a notification about an illiquid market if executing your order would result in the final price you have to pay to be more than 2% different from the (indicative) price that was listed in your dashboard/app. Disabling the market order option protects you as a client from huge losses and allows you to try one of the following options: 

  1. Enter a smaller order, so you don't go as deep into the order book; 
  2. Enter a limit order so that your order is executed only on your desired amount.

Spread illiquid market

In this example:

  • Market price 1 euro for 1 BTC;
  • In the order book the next BTC is to be bought for 1.02 euros;
  • In the order book the next BTC is to sell for 0.98 euros;
  • The spread is higher than 2%. 

In an illiquid market, the spread may exceed 2%. To avoid unforeseen costs with your order, market order entry is blocked. You can try one of the above options to avoid these costs. That's why below warning message is visible:

Buying BTC temporarily disabled
Spread of over 2% for BTC is detected. To continue and avoid unfavourable pricing, place a limit order instead. 

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Slippage illiquid market

In this example:

  • Market price 1 euro for 1 BTC;
  • In the order book the next BTC is to be bought for 1.01 euros;
  • In the order book the next BTC is to be sold for 0.99 euros;
  • The slippage is higher than 2%. 

The risk with a large market order is that your order needs multiple buyers/sellers to be fully filled. The estimated slippage is higher than 2% and can be detrimental to the eventually filled order. Market order entry is therefore blocked out of protection. That's why below warning message is visible:

Buying BTC temporarily disabled 
This order size results in slippage of over 2%. To continue and avoid unfavourable pricing, place a limit order or split your order into several smaller amounts. 

 

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