In this lesson
- find out where the price on an exchange comes from
- understand the difference between a market and a limit order
- see everything you pay for on an exchange
You can think of an exchange as a vegetable market. Only instead of carrots it sells bitcoin, nobody shouts and the stall never closes. The exchange itself sells nothing – it matches people who want to buy with people who want to sell. And takes a small fee for it.
The order book#
All waiting offers are listed in the order book. Sellers and their prices are at the top, buyers at the bottom:
| Price (USDT) | Amount (BTC) |
|---|---|
| Asks – offers to sell | |
| 65,040 | 0.42 |
| 65,030 | 1.15 |
| 65,020 | 0.73 |
| 65,010 | 2.05 |
| Last price 65,000 | |
| 64,990 | 1.62 |
| 64,980 | 0.38 |
| 64,970 | 2.40 |
| 64,960 | 0.91 |
| Bids – offers to buy | |
Between the lowest price someone sells at and the highest price someone buys at there is a gap – called the spread. The more people trade on the exchange, the smaller the spread. Thinly traded coins often have a wide one, and it costs you money the moment you buy.
Order types#
| Order | When it fills | Price | When to use it |
|---|---|---|---|
| Market | immediately | best available | when speed matters |
| Limit | when the price reaches your limit | your price or better | when the price matters |
| Stop | when the price hits the stop price | market | to limit a loss (lesson on risk) |
A market order takes offers from the book one after another until you have bought everything you want. With a big order or a thinly traded coin, part of it fills at worse prices. This difference is called slippage.
A limit order is more patient: it is written into the book and waits for someone to take it. It may also never fill.
What you pay for on an exchange#
- Trading fee – usually a fraction of a percent of every purchase and sale. A limit order waiting in the book is often cheaper than a market order.
- Spread – a hidden fee, see above.
- Deposits and withdrawals – a bank transfer is usually cheap, a card payment pricier. When you withdraw crypto, you also pay the network fee.
Coins on an exchange are not held by you
As long as your crypto sits on an exchange, technically the exchange holds it – you only have a record in your account. If the exchange goes bust or freezes withdrawals, you can lose everything. Why, and how to protect yourself, comes in the lesson on wallets.
Common myths#
- "The exchange sells me the bitcoin." Usually not – another user sells it to you, the exchange just matches you.
- "A market order = the price I see." Not always. With slippage you pay more.
- "A 0% fee means free." The exchange then usually earns on the spread.
Summary
- An exchange matches buyers with sellers; offers sit in the order book.
- The gap between the buy and sell price is the spread – a hidden fee.
- A market order is fast, a limit order protects the price; big market orders suffer from slippage.
- You pay trading fees, the spread, and fees for deposits and withdrawals.