The Bid Ask Spread (Part II)- Steemit Crypto Academy- S4W3- Homework Post for @awesononso
Hey guys.
How are you all? Hopefully, all of you will be good and happy and enjoying your precious health with the grace and blessings of Almighty Allah.
Today, I am here to present the homework for dear professor @awesononso in Week 3 of Season 2 of Steemit Crypto Academy. I have read the whole of the lecture's post and also understood all the concepts. Today our topic of discussion is The Bid-Ask Spread (Part II). So, let's start our discussion without any wastage of time.
There are some questions that are asked by the professor as the assignment for this week and I will discuss all of these questions in the given order.
(01)
Define the Order Book and explain its components with Screenshots from Binance
Order Book, as referred to by the name is a book of orders. Order Book is something like the digital book on which the record of the transactions is noted to avail the traders. As, In our daily life, the businessmen and the dealers of different shops and projects make a daily report of their selling and buying and put the record of these things on a register or a book. This is exactly what we call the Order Book in the world of cryptocurrency.
Order Book is the representation of the data of the orders (sell or buy) that are taking place in the market of any particular asset. Whenever a trader puts an order in the market, the information related to that order is placed in the Order Book. The data of the sell order is noted in the sell order book and data of the buy order is placed in the buy order.
Have a look at the Order Book of the TRX/USDT pair.
As you can see in the above screenshot that the order book of the TRX/USDT pair is showing the buy orders (green) and sell orders (red) respectively. The order book has two main sections that are:
- Bid Section represents the buy orders that are taking place in the market. This section is shown by the green-colored values. Bid Price is the maximum price that a buyer wants to pay for any asset.
- Ask Section represents the sell orders that are taking place in the market. This section is shown by the red-colored values. Ask Price is the minimum price at which a seller wants to sell his asset.
We can also change the range of the order book. Have a look at the screenshot below, it is the order book of TRX/USDT pair at a minimum of 0.00001 USDT.
Now, have a look at the Order Book of the same pair (TRX/USDT) at a minimum of 0.1 USDT.
Importance:
The order book of any asset is used to predict the flow of the market or the trend of the market. Order Book shows the support and the resistance level of a flowing market. The main and the most important benefit of the order book is that it is used to predict the liquidity of any crypto market.
As we know that, the Ask-Bid spread of any market is the difference between the ask price and the bid price of that asset. If the spread of a market is high then the liquidity is low and vice versa.
(02)
Who are Market Makers and Market Takers?
There are two terms that are used greatly in the market of cryptocurrency. The first one is the Market Makers and the second one is the Market Takers. Have an explanatory eye on these two terms.
Market Makers, as referred to by the name, are those traders that make a market by placing Limit Orders in the market. Limit Orders are those orders (Sell or Buy) that are placed in the market at a price other than the market/recent price of a cryptocurrency. The traders that place Limit Order is known as Market Maker.
The existence of Market Makers in any of the crypto market benefit the market. As the limit orders are placed at a waiting rate so they provide liquidity to the market. As they provide something to the marker, thus named as Market Makers.
E.g::-
In the following example, I am considered to be a Market Maker of the TRX/USDT market as I am placing a Buy Limit Order.
Market Takers, as referred to by the name, are those traders that take from the market by placing Market Orders. Market Orders are those orders (Sell or Buy) that are executed at the current market price of the asset. Those who place Market Orders are known as the Market Takers.
Market Takers do not benefit the market as they get out of the market at the market price. They decrease the liquidity of the market as they take out the liquidity along with their Market Orders.
E.g:-
In the following screenshot example, I will be considered to be the Market Taker as I am going to place a market order in the TRX/USDT market.
(03)
What is a Market Order and a Limit order?
Basically, there are two main types of orders that are placed in a market. One of them is the Limit Order and the other one is the Market Order. Stop-Limit Order is also another type of order but our main concern is with the other two.
Market Orders are those orders (Buy or Sell) orders that are placed at the current market price. These orders are executed immediately just after placing them. As these orders are placed at the market price so they are called the Market Orders.
Market Orders are executed at the market price at which they are placed. They are filled rapidly as the buyers and sellers are ready to pay and get the market price respectively. Market Orders affect the liquidity of the market negatively as they take out the liquidity along with the execution of the orders.
Example:-
The current price of the TRX token is 0.09126$ at the time. If I placed an order at this price then it will be called the Market Order.
Limit Orders are those orders that are placed in the market at a price other than the market price. These orders are not executed immediately because they are placed on the waiting list. As they are placed at a specific price created or set by the trader, so they are called Limit Orders.
These orders are not executed rapidly as they are placed at a price other than the market price. These orders provide liquidity to the market so they are proved to be beneficial for the market.
Example:-
The current price of the TRX token is 0.09126$. If I placed a Buy Order at 0.08000$ (lesser than the market price), then this will be called a Limit Order.
(04)
Explain how Market Makers and Market Takers relate with the two order types and liquidity in a market
As we have discussed the Market Makers, Market Takers, Limit Orders, and Market Orders in the above sections so now I am going to relate these all terms.
Market Makers make a market by placing the Market Orders so they provide liquidity to the related market. If a seller places a Sell Limit Order at his willing price then he will provide liquidity to the market by placing it. Thus, they affect the market positively.
Market Takers place Market Orders in the market so they take out the liquidity from the market that is created by the Market Makers. If a buyer placed a Buy Limit Order at his willing price and this price matches the price of the Sell Limit Order created by the seller before then the order will be executed. In this way, the Market Takers take out the liquidity of the market thus affect the liquidity negatively.
(05)
Place an order of at least 1 SBD for Steem on the Steemit Market place by
- First of all, log in to your Steemit Wallet and click on the Steem option.
- Now, open the market by clicking the Market option.
- Now, I am placing the market order at the market price which is 0.081715.
- After confirming the transaction with the Active or Owner key, the SBD will be converted into Steem at the Lowest Ask price.
Observations:-
Shortly after placing the order, it is rapidly executed as the seller of Steem is ready to sell his Steem at the same price. Due to the high Bid-Ask Spread and low liquidity of the Steemit internal market, the order, even after accepting the lowest ask price, will be executed after a short time.
- Now, I will change the price of the STEEM/SBD pair from 0.081715 to 0.060000, as shown in the screenshot below.
- I will get 16.667 Steem from 1SBD at my modified rate.
- The Limit Order will be placed at my desired price which will be executed when someone wants to sell Steem at this rate.
Observations:-
It is observed that my order will not be executed rapidly. Instead, it will be placed on the waiting list and whenever the price touches my fixed price, the order will be executed and the SBD will be converted in the Steem.
(06)
Place a TRX/USDT Buy Limit order on the Binance exchange for at least $15. Explain your steps and explain the impact of your order in the market. (Give Screenshots).
Follow these steps for the accomplishment of this task.
- First of all log in to your Binance account and in the search bar, search the TRX.
- Now, click the Trade option next to the TRX token. Select TRX/USDT pair from there, as I have done in the below screenshot.
- As we have to create a limit order so I have set my Buy Limit to 0.06163$. After entering the amount(16.52$), click on the Buy TRX option.
- A Buy Limit Order will be created which will be filled when the price will touch my set limit. This Limit Order will be shown in the Open Orders menu below. As mentioned in the screenshot.
Impacts:-
My Buy Limit order is created and will be executed/filled whenever someone wanted to sell TRX at this price. Here, I acted as the Market Maker as I provide liquidity to the market by placing a limit order. The value of liquidity which I provided to the market is 16.52300$
(07)
Place a TRX/USDT Buy Market order on the Binance exchange for at least $15. Explain your steps and explain the impact of your order in the market. (Give Screenshots of the completed order).
Follow these steps for the accomplishment of this task.
- First of all log in to your Binance account and in the search bar, search the TRX.
- Now, click the Trade option next to the TRX token. Select TRX/USDT pair from there, as I have done in the below screenshot.
- As we have to create a Market Order so click on the Market option in the Spot menu of the trading page.
- Now, set the amount to 100% which is 16.528$ in my case. Then, click the Buy TRX option.
- The Market Order that I have placed in the market will be executed rapidly.
- The Market Order that I have executed will be shown in the Order History of my account.
Impacts:-
My Buy Market Order is executed rapidly and is filled up by someone who has fixed his sell order before me at the same rate. So, both of the orders are executed rapidly at the market rate. Here, I acted as Market Taker as I have taken out the liquidity from the market which was provided by the seller before. I consumed liquidity worth 16.52$
(08)
Take a Screenshot of the order book of ADA/USDT pair from Binance on the day you are performing this task. Take note of the highest bid and lowest ask prices:
From the above screenshot, it is shown that the highest Bid of ADA/USDT is 2.416$ and the lowest Ask price of ADA/USDT is 2.417$
- Given Data:-
Bid price= 2.416$
Ask price= 2.417$
- To Calculate:-
Bid-Ask =?
- Solution:-
Bid-Ask = Ask Price - Bid Price
Bid-Ask = 2.417 - 2.416
Bid-Ask = 0.001$
- Result:-
The Bid-Ask of ADA/USDT at this time is 0.001$
- Given Data:-
Bid price= 2.416$
Ask price= 2.417$
- To Calculate:-
Mid-Market Price =?
- Solution:-
Mid-Market Price = (Bid Price + Ask Price)/2
Mid-Market Price = (2.416 + 2.417)/2
Mid-Market Price = 4.833/2
Mid-Market Price = 2.416$
Result:-
So, the Mid-Market Price of the ADA/USDT pair is 2.416$ which is actually the Bid Price of this pair.
Conclusions
Order Book is the record of the orders (buy/sell) that are taking place in the market. Market orders are those orders that are executed at the current market price. The traders that place Market Orders are called Market Takers. They take out the liquidity of the market.
Limit Orders are those orders (buy/sell) that are executed at a price other than the market's current price. These orders are placed by the Market Makers. They provide liquidity to the market. Bid-Ask Spread is the difference between the Ask Price and the Bid Price of an asset.
So, that's all about today's lecture post. Hopefully, all of you will like this post.
Thanks to all of you for stopping by ...
Written By : @steemdoctor1 (Crypto Student)
Hello @steemdoctor1,
Thank you for taking interest in this class. Your grades are as follows:
Feedback and Suggestions
You have don quite well on the topic.
The answers t questions 1 and 2 still need some work.
A screenshot is missing in question 5a.
Thanks again as we anticipate your participation in the next class.