A Beginner’s Guide To Bid Price, Ask Price, and Spread in Bitcoin Trading

One of the first concepts that an aspiring Bitcoin trader needs to understand is how trading actually works. In order to do so, it is highly important to understand trading terminology. More specifically, you should understand what Bitcoin bid and ask price refers to.

This guide will help you understand what Bitcoin bid and ask price means and the importance of the bid-ask spread. 

Understanding Bitcoin Bid and Ask Price

What are bid and ask prices in the Bitcoin market? The terms “bid and ask” represent the two prices traders can purchase Bitcoin at.

The first one is the bid price, this is the highest price that a buyer is willing to pay to obtain the asset. Then there is the ask price, this represents the lowest price that a seller is willing to sell the asset at. In order for the trade to occur, the buyer must find and accept the best available offer. Alternatively, the seller must find an acceptable bid and accept it in exchange for their assets. 

How Is Bitcoin Bid and Ask Price Decided?

Typically, bid and ask prices are decided by the market. Multiple factors determine the price of the asset, such as market sentiment. The sentiment can be positive, negative or neutral. It shows how investors feel about the asset at any given time. Positive sentiment tends to indicate that the prices will rise as people are seeking to buy. 

Essentially, investors’ decisions dictate the sentiment and sentiment signals to other investors what to do. As long as the demand outweighs the supply — meaning more people are buying than selling — the sentiment will remain positive. At the same time, the Bitcoin bid and ask price will keep rising.

However, if the supply exceeds demand, bid and ask prices will start drifting downward. This change can happen rather suddenly, so always remember to keep an eye on the market direction and market sentiment as well as the price. 

What Is the Bid-Ask Spread, and How Does It Work?

Now that you understand how Bitcoin bid and ask price works, it is time to explain the bid-ask spread. The bid-ask spread is essentially the term for the gap between the lowest ask and the highest bid. It can be formed in two ways. The first way is for it to be created by a broker or some other trading intermediary. 

Another way is to simply represent the difference between the two orders. As such, it is created by traders in the open market. When it comes to crypto trading, most of it takes place on crypto exchanges. Therefore, the buying and selling orders are placed by the traders themselves. As a result, the exchange does not profit from the spread. Instead, it gets its profits from the trading fees.

Markets that experience high volume tend to have low spreads, as they have high liquidity and there is higher competition between both buyers and sellers. However, markets with low liquidity can have rather significant spreads. But, since we are talking about Bitcoin, the spread tends to remain fairly low for the most part.

What Is the Importance of the Bid-Ask Spread?

With this information in mind, it is wise to keep an eye on the bid-ask spread for a number of reasons. First, as mentioned, it can give you an insight to how liquid the market is. The lower the spread is, the more liquidity there is. That means that there are multiple buy and sell offers. And, when there are many offers, there is greater competition, so you could encounter better prices.

However, there are also situations where major crypto pairs have tight spreads. If that is the case, the bid-ask spread doesn’t really matter. On the other hand, newer and lesser-known assets could have large spreads, this makes it a lot harder for traders to identify sufficient entry prices. This may not be an issue if you are a long-term trader, however, if you are just seeking to earn from short-term trading, these are not ideal conditions.

A general rule is to trade with a limit order if the bid-ask spread exceeds 1%. That way, you can get a desired price without ending up with a major loss. Alternatively, you could simply look up a different, more popular exchange. Assuming that it lists the asset you are interested in, it is popular that trading opportunities are more numerous.

Does the Bid-Ask Spread Change in the Bitcoin Market?

The simple answer is yes. The bid-ask spread in the Bitcoin market changes all the time and at times, the change can be quite dramatic. This can happen in periods of market turmoil or low liquidity. During such times, traders tend to be very careful with what they buy, and at what price. As a result, it might happen that they are unwilling to pay a price that goes beyond a certain threshold.

The same is true when it comes to sellers, who might keep encountering offers that are below their desired price. Simply put, there are situations when it is best for traders to stay put and wait for better trading opportunities.

Who Can Benefit From the Bid-Ask Spread?

Bid-ask spread is beneficial to trading platforms in traditional markets, as it allows them to earn money. As previously mentioned, brokerages can use it as a means of making a profit. However, that doesn’t work with cryptocurrencies, as exchanges profit from trading fees.

Instead, when it comes to Bitcoin markets, those who benefit the most are traders themselves. The bid-ask spread can give them a hint regarding the market situation. They will get a rough idea about liquidity, and a quick glance will tell them if there are numerous offers. Tight spreads might be taken as a signal that it is better to seek out a different platform.

Again, since it is Bitcoin that we are talking about, low spreads are a rare occurrence. Bitcoin is paired against all major cryptocurrencies, as well as a fair number of smaller ones. With that being said, no matter where you go to trade, chances are that there will be plenty of offers.

The Bid-Ask Spread Can Help You Become a Better Trader

Bitcoin bid and ask price is one of the basic concepts that you need to understand as a trader. It is of great help when it comes to making trading decisions and price analysis. Furthermore, bid-ask spreads can even help you determine where to trade. There is a lot of insight that a skilled trader can gain from these few pieces of information. Understanding how it works and how it can serve you can be done fairly easily. This means that even a beginner can quickly assess the market with a single glance.

Hopefully, this guide has given you insight into how it works and why it matters. With a little practice, you can start developing the same skills as experts. While this is only the first step in becoming a professional, it is a crucial one, so learn it well.

FAQs

Do I Buy at the Bid or Ask Price?

Buyers purchase assets at the bid price, which refers to the price they are willing to pay. The highest bid price that someone is willing to pay is called the best bid. Bid is typically lower than the ask, as it is in the buyer’s interest to pay as little as possible.

What Is Bid in BTC?

The bid price for BTC changes continuously in accordance with the BTC price itself. Since the price fluctuations are a constant in the crypto market, the same goes for bids.

What Happens When the Ask Is Higher Than the Bid?

When the ask price is higher than the bid, the spread is considered positive. If this changes and the bid exceeds the ask, this represents an excellent opportunity for sellers. They get to sell BTC at a price that is above the lowest they are willing to sell at.

Why Is the Ask Price Higher Than the Bid?

The ask is higher than the bid because it is in the seller’s interest to earn as much as possible. Meanwhile, it is in the buyer’s interest to pay as little as possible.