Today we’re going to investigate the order book, to understand what exactly is going on when you buy and sell cryptocurrencies.

What is an Order Book?

Order books are ledgers (lists) containing all outstanding buy and sell orders for a particular digital currency. You’ll often hear these terms referred to as bids (when you place a buy order) and asks (when you place a sell order).

How Sell & Buy Orders Work

When a buyers “bid” matches up to the sellers “ask” a trade initiates for the quantity specified in the buy order.

But what if the sellers ask order doesn’t have enough coins to sell for the amount requested in the buyers bid order?

Great question! This will depend on the type of bid the buyer has placed when creating their order.

There are two core types of bid orders you need to be aware of – market orders and limit orders.

In a market order, the buyer indicates they want to buy immediately for the best price.

This causes all sell orders from lowest to highest to fulfil the order based on the quantity requested. For example, say I want to buy 3 bitcoin for the market rate.

The sell book may have 2 bitcoin in total for $18,000 but the next lowest ask is 1 bitcoin at $20,000. This means I will buy 2 bitcoin at $18,000 and 1 bitcoin at $20,000, giving me an average sale price of $18,666 ($56,000/3).

In a limit order, the buyer indicates they only want to buy coins at the specified price. Any coins not purchased will remain as a buy order until a seller places an ask at the buyer’s bid price.

This same process applies in reverse for sellers.

Ok…but what if I place an ask or bid at the same price as someone else?

In this scenario, the orders add to the back of the queue, meaning it will be the last order to process at that particular price.

Understanding The Cryptopia Order Book Columns

On the Cryptopia exchange, the buy and sell order books contain Price, Amount, Total & Sum.

Order Book Columns Explained

Let’s break down each of the columns below:

Column Definition
Price This refers to the ask/bid price for the order
Amount The total amount of the selected currency (in our example BTC) available at this price
Total The total order amount available in the currency you are buying with or selling for e.g. New Zealand Dollars
Sum The grand total order amount at the selected price including all orders at that price point and below (see the green square in above image for illustration).

Understanding the Sum column is useful for identifying where the majority of the sell/buy orders are clustered and to identify potential market manipulation.

Another way to see this more visually is the order book depth chart.

Here we can see easily see the market depth for Bitcoin currently, with the upwards spikes often being referred to as ‘walls’.  The higher the y-axis line, the greater quantity of orders at that price.

Many high volume traders will often create walls as a technique to push up or down the price of a particular coin. This is due to traders setting orders ahead of the wall so they are processed first. In the case of a buy wall, high volume traders (often referred to as whales) can force up the price of a cryptocurrency and then quickly sell off their coins at the higher price for profit. This technique is known as a ‘pump and dump’ in the cryptocurrency scene.

Small volume traders if observant can identify a pump and dump situation and time the sale of their coins for an additional profit also. This strategy can backfire (it’s happened to me before) and I  recommend spending your first few weeks attempting to spot these trends first without committing any capital.

So there you have it, that is how to interpret the order book, not so daunting now right?!