In this post we will elaborate how market and limit orders work. These two order types are available for all traditional exchanges I’ve encountered.
When placing a market order with an exchange your cryptocurrency will be bought or sold “instantly” at the best price available. But what is this best price?
Here you see a Screenshot of the Live Order Book from Bitstamp. On the left side we see the bids. This is the price people are willing to pay for coins at the moment. You can see that the highest price of any bid was 8181.77 USD. On the right side you see the asks. This is the price sellers want for their coins. The lowest price someone is willing to sell their coins for was 8184.16 USD. Usually the bid and ask prices have a slight spread. A transaction can take place once a buyer is willing to pay the ask price or a selling is willing to accept the bid price. So when placing a market buy order for 1 BTC at this moment you should get the 0.0000211 BTC at 8184.16 USD plus 1-0.0000211BTC at 8207.75. If you were to sell 1 BTC you would get exactly 8181.77 USD for it. Note that fees might apply on top of this in both cases depending on the exchange you use. If the cryptocurrency you wish to buy is traded at high volume and you do not assume that the price will fall, then market orders are a good option. However if the volume is really low and / or the volatility is really high slippage will occur. Slippage means buying above or selling below market price. So in most situations it is better to use limit orders.
Limit orders are not subject to slippage as you can set the price yourself. You will either get a better price or the price you asked / bid for. Assume you want to buy 1 BTC at a price of 8190.12 USD. You would instantly buy the 0.0000211 available BTC at 8184.16. This partially fills your order. The remaining 0.9999789 BTC will be put into the “Live Order Book – Bid” at the price you set, which will give you the top spot. Once a seller accepts your price or a seller uses a market order another trade will happen. This process repeats until you have bought a total of 1 BTC. The same principle applies when you sell with a limit order. Asuume you want to sell 1 BTC for at least 8181.50. Then your order would be filled with the highest current bid at 8181.77. So you would have actually gotten more than what you asked for. This is the nice thing about limit orders. I highly recommend using this type of order, unless the markets are moving so fast you cannot keep up. Usually the fees for limit orders are also lower or equal to market orders.
Some exchanges offer more order types, but these won’t be covered in this post.