A look at how order books and market orders work

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It’s important to emphasize that investment in cryptocurrency involves significant risks and it is possible that you may lose a substantial proportion or all of its investment in cryptocurrency. Before you invest, we suggest you read more about the risks here.

These series of posts help you get familiar with Bitso Alpha and teach you how to trade. If you want to start trading cryptocurrencies, but don’t know where to start, these posts are for you.

In our previous post, we wrote about the different features of the Bitso Alpha trading platform. Today, we’ll look closer at order books and market orders.

A trading platform gives you a holistic understanding of a certain market. One key component is the order book. An order book shows you the current price of a currency, the current buy and sell orders, and how liquidity (available funds in open orders) is on the market.

Traders use the order book, as well as other indicators, to analyze a market and decide when to buy and sell.

Like we mentioned last time, each cryptocurrency has its own order book. At any time, you can open Bitso Alpha and check out the price of BTC vs. MXN or how many orders need to be filled in the Ethereum order book.

By just looking at the order book, you can determine if a market is healthy or not depending on the number and size of orders in the order book or movements in the market, like if there are more sell than buy orders.

Now that you understand that movements in the order book are a way to analyze the market, let’s take a closer look at how it works when you place a market order.

In cryptocurrency trading, an order is a trader’s commitment to exchange one currency for another currency. For example, on a BTC purchase, the trader is committing an amount in MXN to trade for BTC.

On the right-hand side of the Bitso Alpha platform is where you place your orders.

When you click on Order Type you get the following options:

  • Market
  • Limit
  • Stop-Loss
  • Stop-Limit

In this post, we’ll explain what market orders are and how they are filled.

Let’s use an imaginary market order to buy 0.5 BTC to explain how market orders are filled.

With a market order, you cannot select the price at which you want to buy, instead, you choose how much you want to spend or how much you want to receive at the current market rates. Notice that you can toggle between BTC or MXN, letting you decide what currency you want to measure how much you’re buying.

We will use the following snapshot of an Order Book for BTC/MXN market for the examples in this article:

Keep in mind that order books are constantly changing. They are updated several times per second with new orders placed by other traders.

For our example, imagine that before placing an order, the order book looks like the one above.

Market orders are executed immediately and filled with the top orders from the other side of the order book. This means that a market order to buy is executed immediately against the top-selling orders, and the market selling orders are executed against the top buying orders available at the moment.

In our example, when we submit our market order for buying 0.5 BTC, we will actually trade with the top 3 selling orders:

For our order to complete the 0.5 BTC order, it will buy the first order for 0.02 at a price of 200,500.00 MXN, then continue with the order of 0.30 BTC at 200,600.00 MXN. Lastly, it will consume 0.18 BTC from the third-order at 200,700.00 MXN, leaving only 0.32 BTC pending to be sold on that order.

Our market buy order has been completely filled at this point, but it left the third-order partially filled. The order book will now look like this:

Notice that as a result of our transaction, the price of BTC has raised from 200,500.00 MXN to 200,700.00 MXN. Injecting liquidity into the BTC market moved the price up. Bitso acts as the marketplace, but it’s the actions of the traders who move the prices up or down.

Once orders are filled, they become Trades. Trades are what we call the executed transactions. For this market order the following trades were generated:

Trades are displayed in Bitso Alpha in a column at the left of the Dashboard:

Trades are the actual price history of Bitcoin: it is the data that is shown in price graphs. We’ll touch on graphs in a later post.

In our next post, we’ll cover Bitso’s fee model, limit orders and the difference between stop-loss and stop-limit orders.

Special thanks to Bitso user Luis Andrés Hernández González for your valuable contribution to this post.

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