What Is a Crypto Order Book?

Cryptocurrencies have given the green light to a new type of trading that uses technology to enable secure, transparent, and decentralized financial transactions. The order book is one of the main components of cryptocurrency trading and analysis.. In this article, we will analyze in detail what an order book is, how it works, and how it can be used in trading cryptocurrencies.

What is an order book?

An order book is a real-time record of all buy and sell orders for a specific cryptocurrency placed on a crypto exchange, sorted by price levels. It lists the current bids (buy orders) and asks (sell orders) for each cryptocurrency available on the exchange, allowing traders to see the current market demand and supply levels.

Order book on WhiteBIT

The order book in crypto trading is also commonly called the “order depth chart” or simply the “depth of market” or DOM. This is because the order book displays the depth of buy and sell orders at different price levels with a specified number of assets, which allows traders to see the overall depth of the market and assess the liquidity of the cryptocurrency on the exchange.

The term “depth” refers to the number of buy and sell orders at each price level in the order book. A deep order book indicates a high level of liquidity, with many buyers and sellers willing to complete trades at different price levels. On the other hand, a shallow order book indicates lower liquidity and weak interest of buyers and sellers in the market.

Numerous traders apply a strategy called “Order book trading”, using the order book to monitor the demand and supply levels, see the trading volume, and assess the liquidity of a particular cryptocurrency. Nevertheless, orderbook trading requires a good understanding of market dynamics and the ability to quickly analyze large amounts of data. Traders need to be able to recognize patterns in the order book, identify big players, and react rapidly to changing market conditions.

Order book structure

The order book is structured with the bids on one side and the asks on the other. Each side lists the price, the quantity, and the total value of the orders.

The buy orders are arranged in descending order of price, with the highest bid at the top of the list. Conversely, the sell orders are arranged in ascending order of price, with the lowest ask at the top of the list. Below, we will explain how to read order book.

How to read crypto order book?

Reading a crypto order book requires an understanding of its structure and terminology. The bids and asks are listed in different columns, with the orders’ price, quantity, and total value. The bid-ask spread is the difference between the highest bid and the lowest ask, representing the market liquidity.

Traders can use the order book to identify support and resistance levels. The support level is the price at which there is significant demand for the cryptocurrency, while the resistance level is the price at which there is substantial supply.

Market depth is essential for traders because it can affect the price of a cryptocurrency. Let’s imagine there is a high demand for a cryptocurrency, and the market depth is shallow, meaning that there are few sell orders at a given price level. In that case, the cryptocurrency’s price will likely increase as buyers compete to purchase it. Conversely, suppose there is a high supply of a cryptocurrency, and the market depth is shallow, meaning that there are few buy orders at a given price level. This way, the cryptocurrency’s price will likely decrease as sellers compete to sell it.

The formation of a cryptocurrency exchange order book involves several parties, including:

1. Exchanges: The exchanges are the primary platform where traders place buy and sell orders. These exchanges provide the order book and matching engine infrastructure to execute trades.
2. Traders: Traders are the ones who place orders in the order book. They can place buy or sell orders with a specified price and quantity.
3. Liquidity Providers: Liquidity providers are traders who provide liquidity to the market by placing orders in the crypto orderbook. They can be individuals, market makers, or institutional investors.
4. Market Makers: Market makers are traders who provide liquidity to the market by continuously placing both buy and sell orders at different prices. Their goal is to create a two-sided market and narrow the bid-ask spread.
5. Order Book Aggregators: An aggregated crypto order book collects and displays data from multiple exchanges to provide traders with a comprehensive market view. They allow traders to compare prices and execute trades across different platforms.

How are order books used in trading?

Traders use the cryptocurrency order book to execute their trades based on their trading strategies. Traders can place two types of orders in the order book: buy orders and sell orders. Some traders target large orders by identifying price levels to trade in a narrow price range between bids and asks. Earlier, we mentioned a crypto order book strategy, which can become a valuable addition to technical analysis and other trading strategies.

Buy Orders

Buy orders on a crypto exchange are instructions traders give to purchase a specific cryptocurrency at a specified price. In other words, a buy order is placed by a trader who wants to buy a certain amount of cryptocurrency at a specified or at a market price. Buy orders can be placed at different prices.

A “Market” order is an order which is instantly executed at the current market price. You only need to enter the number of assets you want to sell or buy. A Market order is unsuitable for large buys or sells where there may not be enough liquidity in the order book to execute the entire trade at the current market price, which can result in serious losses.

A “‎Limit” order is an order that allows you to set a price limit for a trade. The transaction will be executed only at the specified price or better than the market price. Limit‎ is useful to avoid price slippage in the order book.

For example, you want to buy 1 BTC when the price reaches $20 000. Then you indicate in the Limit order that you want to buy 1 BTC for $20 000. If the price of Bitcoin reaches this mark, then the buy order will be automatically executed by the exchange, and 1 BTC will be credited to your balance.

Limit order for buying cryptocurrency in the WhiteBIT trading terminal

After that, as the user has filled in the given data and placed the Limit order to buy BTC, this order will be placed at the bottom of the order book. If the price reaches the specified level, the order will be executed.

Buy orders in WhiteBIT’s order book

It’s important to note that buy orders can only be executed if sell orders are available at the specified price. If no sell orders are available at this price, your order will remain open until a matching sell order is found or until you cancel the order.

Sell Orders

A sell order on a crypto exchange is an instruction from a trader to sell a certain amount of a cryptocurrency at a specified price. When a sell order is placed on an exchange, it becomes part of the crypto exchange order book.

When a trader places a sell order, they offer to sell their cryptocurrency at a specific price. Suppose a buyer is willing to buy the cryptocurrency at a set price or higher. In that case, the trade will be executed, and the seller will receive the agreed-upon amount of fiat currency or another cryptocurrency in exchange. For example, in BTC/USDT, BTC/UAH, BTC/ETH, and other trading pairs.

Sell orders in WhiteBIT’s order book

Similar to buy orders, sell orders can be placed as Limit orders or Market orders. A Limit order specifies the exact cost the seller is willing to sell their cryptocurrency. In contrast, a Market order instructs the exchange to sell the cryptocurrency at the current price.

Limit order for selling cryptocurrency in the WhiteBIT trading terminal

It’s worth mentioning that sell orders can also be used to take profit or cut losses. If a trader holds a long position (i.e., buying cryptocurrency) and they believe the price will no longer rise, they can place a sell order to exit the position and lock in their profits. Conversely, if a trader holds a short position (i.e., selling cryptocurrency) and believes the price has reached a minimum and will begin to rise again, they can place a sell order to cut their losses and exit the position.

Effectiveness of order books: pros and cons

The order book provides traders with a large amount of information that can be used to make informed trading decisions. It allows traders to see the current market demand and supply levels, monitor the order book volume, and assess the liquidity of a particular cryptocurrency.

An order book analysis helps to gain insights into market sentiment and potential price movements. It involves studying the order book’s buy and sell orders at different price levels to identify patterns and trends.

Some of the key metrics that are analyzed during order book analysis include:

1. Order book depth refers to the number of buy and sell orders at each price level. A deep order book indicates a high level of liquidity, while a shallow order book suggests lower liquidity and potential price volatility.
2. Bid-ask spread indicates the difference between the highest buy order and the lowest sell order in the order book crypto. A tight bid-ask spread shows a balanced market, while a big spread suggests a potential price imbalance and a lack of interest in the asset.
3. Volume at price levels shows the amount of buying or selling pressure at different price levels. High volume at a specific price level suggests a significant level of support or resistance for the asset.
4. Order flow imbalance refers to the ratio of buy orders to sell orders in the order book. A high proportion of buy orders to sell orders indicates bullish sentiment, while a high ratio of sell orders to buy orders suggests bearish sentiment.

Crypto order book analysis can help traders identify potential support and resistance levels, predict price movements, and make informed trading decisions. It is often used in conjunction with other technical and fundamental analysis methods to gain a comprehensive view of the market.

However, the crypto trading order book has some limitations. Large traders or market makers can manipulate the information in the order book, which can distort the true market demand and supply levels. Additionally, the order book only provides a snapshot of the market at a particular time and may not reflect the overall market trends.

The bottom line

So, what is an order book crypto? It is an essential tool for traders that provides real-time information about the supply and demand levels of a particular cryptocurrency in a specified trading pair, trading volume, and liquidity.

How to read crypto order book? Traders can use the order book to identify support and resistance levels, gauge market sentiment, and assess a specific cryptocurrency’s trading volume and liquidity. To effectively use the order book, traders must have a deep understanding of its structure and terminology and develop a sound trading strategy that considers the information provided by the order book and other market indicators. In summary, the crypto order book is critical for making informed trading decisions and developing effective trading strategies, giving traders a competitive advantage in the cryptocurrency market.