What's the Difference Between Bid, Ask, Buy, and Offer in Crypto Trading?

in #cryptocurrencies3 years ago (edited)

Buying bitcoin from an exchange can be a daunting task at first glance. With the technology being so new and unfamiliar, new investors might assume that buying it would require a degree in finance.

The reality is that buying bitcoin from an exchange is no different than buying any other commodity or stock. Understanding exchange sales come down to mastering four simple terms:

  1. Ask
  2. Bid
  3. Offer
  4. Buy

The same concepts that go into any buying arrangement are in play for altcoin exchange purchases. To explain these terms and how they come together, let's imagine a buyer buying a used car at an auto lot. 

ASK

The best way to imagine the ask price is the lowest price for which our would-be car lot would sell a particular car at a particular time. Sellers are typically free to sell their bitcoin for whatever they like. However, due to the high liquidity of the bitcoin market, sellers will likely buy bitcoin at the lowest price currently available. Just as a popular model of car will see its price creep upward with increased sales, the accepted ask price for an exchange is directly tied to demand, with that ask price likely changing on a regular basis throughout the exchange day.

Bitcoin can be sold above the ask price because of volume liquidity and transaction churn, but never below it.

Just as the dealership's ask price will likely be the advertised price for the car, an exchange's ask price is typically advertised as the average of the selling prices across the various exchanges, which determines the price for bitcoin.

The way to remember this is to think of the price the exchange is asking for a bitcoin.

BID

The bid price is the most our would-be buyer would pay for a car at our imaginary car lot. Likely, our buyer has researched the latest market trends regarding the car and local prices for it and have come up with a number that seems reasonable. Just like with ask prices, buyers are free to name their own bid prices. However, if the bid is out-of-line with the exchange's ask price, it will typically be ignored.

Usually, the bid price matches the sale price of the last successful exchange sale. While bitcoin can be bought below bid due to volume liquidity, it cannot be bought above it. 

The way to remember bid is that it is the price at which the buyer is willing to buy a bitcoin.

OFFER

After the ask and bid prices have been tussled around, the car seller comes up with a price for the car. This price is the offer or the price for which car dealership is offering the car. In exchange sales, the offer is always the highest bid price. As the bid does not always have to be the ask price, the offer can be lower than the current exchange price. 

The offer may also differ from the bid due to high latency between trades and the natural movements of the market. The offer is not the final price of the bitcoin, as it does not reflect exchange fees or commissions.

The way to remember this is to think of the offer as the exchange's final offer for the bitcoin.

BUY

Buy is simple. The buy or purchase price is a particular buyer's bid price that matches an exchange's offer price. In our example, it is the price for which our car buyer buys the car. 

The buy price is the price that concludes the sale. If the buy price is rejected, a new offer or bid price must be negotiated.

Conclusion

Understanding these basic terms as they apply to the bitcoin market will make it easier to understand pricing on the market. This is key to understanding the risk in investing and learning how to efficiently buy and sell bitcoin. In order to master bitcoin investing, it is essential to know how to play the game. Learning the terminology is a strong first step in this direction.

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Great explanation. Love it. At least people will learn a lot from it.

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