How Are Cryptocurrency Prices Determined?

Bitvavo brings buyers and sellers of digital currency together, and the principle of supply and demand determines the prices of all digital currencies. Before we explain further, the following terms are important to understand:

  • Bid Price.
  • Ask Price.
  • Market Price.
  • Spread.

These terms will be explained further below and there will be an example to further illustrate them.

What is the Bid Price?

The bid price is the price the best buyer (the highest bid) wants to pay for a digital currency. The bid price indicates the price this buyer is willing to pay and how much digital currency he is willing to buy for that amount.

What is the Ask Price?

The ask price is the price the best seller (the highest selling price) wants to receive for selling his digital currency. The ask price indicates the amount for which this seller wants to sell its digital currency as well as how much digital currency he is willing to sell for that amount.

What is the Market Price?

The market price is an indication of the price provided by Bitavo on its platform and based on the average between the bid price and the ask price. When you decide to buy or sell, the market price will always be slightly different from the actual price you pay (in case of a buy order) or receive (in case of a sell order).

What is the Spread?

The spread is the difference between the best bid price and the lowest ask price of a specific digital currency at a given moment.

Example of a Liquid Market

Let's assume the following:

  • The best buyer offers a maximum of €999 for a Bitcoin (bid price).
  • The best seller wants to sell his Bitcoin for a minimum of €1.001 (ask price).
  • This leads to a market price of €1.000 per Bitcoin, which is the average of the bid price and the ask price.
  • The difference between the best buy price and the best sell price in this example is  €1.001 - €999 = €2 (spread).

If both the buyers and sellers stuck with their prices, no transaction would occur. Once a buyer decides to pay €1.001 for a Bitcoin, or a seller decides to sell his Bitcoin for €999, there is a match and a transaction will take place.

Example

Let's assume that one of the buyers decides to pay €1.001 for a Bitcoin which results in a transaction. In such case, the buyer would pay €1 or €1 / €1.001 = 0,1% more than the indicated market price. Please note that this difference does not benefit Bitvavo but is the result of a higher ask price than the market price.

Example of a Semi-Liquid Market

Let's assume the following:

  • The best buyer in this example offers €0.99 per Bitcoin and would like to buy 10.000 Bitcoin (bid price).
  • The best seller at that time wants to sell his 1.000 Bitcoin only for at least €1.01 per piece (ask price).
    • A second seller wants to sell his 3,000 Bitcoin for €1.02 per piece.
    • A third seller wants to sell his 6.000 Bitcoin for €1.03 per piece.
  • In the above example, the market price of the Bitcoin is €1.00, which is the average of the best bid price and the best ask price.
  • The difference between the best available purchase price and the best available selling price in this example is €1.01 - €0.99 = €0.02 (spread).

If all buyers and sellers stick to their own price, no transaction will take place. However, if the buyer decides to pay €1.01 per Bitcoin or if a seller decides to sell Bitcoin for €0.99 each, a transaction will take place.

Example

Let's assume that the buyer decides to buy the desired 10,000 Bitcoin all at once. In this case, the buyer needs to pay: €1.01 * 1.000 + €1.02 * 3.000 + €1.03 * 6.000 = €10.250. Consequently, the buyer paid € 250 or €250 / €10.250 = ~ 2.4% more than was indicated. Once again, please note that this difference does not benefit Bitvavo but is the result of an ask price higher than the market price due to the size of the order.

You will receive a notification whenever the price you will need to pay differs more than 2% from the market price.

Example of an Illiquid Market

Let's assume the following:

  • The best buyer in this example offers €0.98 for one Bitcoin (bid price).
  • The best seller at that time wants to sell one Bitcoin only for a minimum of €1.02 (ask price).
  • In the above example, the market price of Bitcoin is €1.00, which is the average of the offer price and the ask price.
  • The difference between the best available purchase price and the best available selling price in this example is €1.02 - €0.98 = €0.04 (spread).

If all buyers and sellers stick to their own price, no transaction will take place. However, if the buyer decides to pay €1.02 per Bitcoin or if a seller decides to sell Bitcoin for €0.98 each, a transaction will take place.

Example

Let's assume that one of the buyers decides to pay €1.02 for one Bitcoin which results in a transaction. In such case, the buyer would pay €0.02 or €0.02 / €1.02 = ~2,0% more than was indicated. Please note that this difference does not benefit Bitvavo but is the result of an ask price higher than the market price.

You will receive a notification whenever the price you will need to pay differs more than 2% from the market price.

Please note: To simplify the examples mentioned above, any potential trade fees were not included. Please note that a trading fee up to 0.25% of the traded amount may apply.

Why Do I Receive a Notification About an Illiquid Market?

We simply want to make sure you are aware that the price you are paying or receiving differs from the market price.

How Can I Avoid Spreads?

To avoid spreads, you can:

  1. Submit an order with a smaller order size; or
  2. Submit a limit order which will be executed for the submitted price.

If you would like to have your order completely and directly executed in full and at once, the price difference is unavoidable.

Why Are Market Prices Constantly Changing?

The price of a digital currency is affected by every transaction completed. As such, the price of an asset can change multiple times per minute as transactions occur.


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