Steemit Crypto Academy Season 4 Week 3 - Homework Task for @awesononso | The Bid-Ask Spread (Part-2)
Hello everyone, I hope you're all doing fine. The same goes for me.
In this post, I'll be posting a homework task for crypto professor @awesononso.
This homework post will cover the topics related to Bid-ask spread and continue the topic from the last post. I'll explain in every possible detail what it means and illuminate other aspects related to it. We'll discuss terms like Market makers, Market orders, Market takers, The Order Book, and others. We'll see what an order book is and how it's useful to a trader. Well, be doing some practical trades to explain limit order and so on.
I'll explain these terms, their uses and examples, and many other aspects using fully referenced and markdown images from various sources present on the internet. Also, the post is optimised for mobile devices and Pcs running on Windows and Macs systems only, which use (1388X768)resolutions and for a bit higher. In case of any irregularity, please consider switching devices. In any case of problems and issues, you can also reach out to me in the comment section.
Define the Order Book and explain its components with Screenshots from Binance.
To simply explain, an order book is a document that contains an asset's buy and sells activities around various trading platforms. It shows the prices of the assets that people are willing to pay and those willing to sell any particular asset.
Sides for both the buyers and sellers
Because an order book records the market prices for any asset, It includes both the main market players, i.e. the buyer and the seller. The buyer's side is called the bid side, where they bid for an asset on the specified amount, denoted by green colour. The seller's side is known as the ask side, where they ask for a specific price for the asset, denoted by red colour.
Specified Prices
It shows the price the sellers are asking for and the amount for which the buyers are bidding.
Visual demonstration for better understanding
Visual demonstration in an order book helps the reader understand the theme of an order book quickly and to understand the demand and supply, along with displaying the interaction between the buyer and the seller. A visual demonstration can include tables, line charts, and bar charts etc.
Advantages of an order book
An order book helps the trader know the updated prices of any asset they are willing to buy and sell.
It helps to make an informed decision without any hassle.
Additionally, it's an excellent instrument that can help understand the market dynamics and trends over time.
Is it useful? A conclusion
It is helpful for the traders to take an informed decision, and it can help them get insights into the Market they're planning to enter. Therefore, it is true that this is very useful.
Who are Market Makers and Market Takers?
Market makers
Market makers are individuals who sell or buy an asset for their account. They are the resources in any market that functions to maintain its liquidity while profiting from the variation in the bid-ask range. In simpler words, they make buying and selling easier for the traders by facilitating the smooth flow of the financial Market.
Market takers
We have learnt about Market orders, now the type of traders who begins the market order is called money takers. In other words, the traders who buy and sell immediately are known as Market takers.
And as their name already gave you a hint, they take away the liquidity with a market order. Whenever you are making an order on the order book, you create liquidity and facilitate the traders' easy buy and sell process. However, when the money takers place the order, all the available offers on the order book are filled instantly.
What is a Market Order and a Limit order?
Market Order
A market order is the most basic trading order in which the specified asset is bought or sold at the currently available best price. Unlike the limit orders, market orders are executed spontaneously and the available market price.
How does it work?
The trader accepts a market order as soon as the seller puts it up, which either results in advantageous or worse for the buyer. A market order is suited for the businesses type which is most likely to transact at the earliest.
Advantages
Best suited for the traders who want to buy and sell any asset immediately.
It cuts the chase for traders and helps them make quick decisions to avoid missing a great move with huge profit potential or cover some of their losses.
They are well-suited for liquid and often traded assets.
Limit order
Simply speaking, a limit order allows the trader to set a specified price for an asset to buy or to sell. It is executed when the market price of the asset reaches the limit order price or higher.
For example, if a trader wants to sell the cryptocurrency at EUR 9000, so the price of the limit order should be set as EUR 9000 on the selling side.
Limit orders are useful if you're not in a hurry or rush in trading, and it also guarantees that you are not getting any less amount or pay more than a specified time.
Explain how Market Makers and Market Takers relate with the two order types and liquidity in a market.
Market makers and market takes have an interdependent relationship as every trade in the Market occur because of their trading activities. Market makers place orders, and then the orders were filled or bought by the Market Takers.
Market makers add liquidity to the crypto market, as they place limit orders which take time due to price ups and downs, and it takes time for the price to be equal to the filled limit order price by the trader or market maker.
As a result the supply of assets remains in platform for longer periods which promote liquidity.
Place an order of at lease 1 SBD for Steem on the Steemit Market place by
a) accepting the Lowest ask. Was it instant? Why?
b) changing the lowest ask. Explain what happens.
(Make sure you are logged in to your wallet).
STEP 1: To perform his task, firstly you need to login to your steemit account and go to your wallet. After going to the wallet, scroll down and find steem dollars.
Click on the drop-down icon, a menu will be displayed. After that, click on the Market icon.
STEP 2: after that let's see the current lowest ask price.
At the time of creating this post, the lowest ask price was 0.083012.
(
)
STEP 3: As we're accepting the lowest price, put the amount of SBD that you want to exchange at current lowest price.
I've put the amount of SBD as 1 and the steem I'll get from this will be 12.047 which is at current lowest ask price.
STEP 4: Confirm order and fill steem Active Or Owner keys.
The order will be confirmed.
- It'll show that the order is placed instantly because the price we're willing to pay is equal or similar to the price that the seller was willing to sell the asset for. In short, we gave a seller his quoted amount for the asset. Also, the transaction will take a little amount of time due to low liquidity on the platform.
- Now let us change the lowest ask and see what happes.In the image below I've changed the lowest ask From 0.083036 to 0.06.And you the see that the amount of Steem will Automatically changed and become 16.667 STEEM for 1 SBD.
Now Click on Buy steem and See what Happens.
The Order will be confirmed but it'll not fill. As the amount that we're paying is low as compared to the Ask price. Whenever the amount will coincide with our changed lowest ask then the order will be filled automatically.Also it si to notice that the order we've placed here is an limit order and will fill when the price becomes equal to the limit price filled by us to create the order.
Also, it'll maintain some liquidity in the Market.
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).
To place a Buy limit order, First login to your Binance wallet and then follow the Steps Carefully.
STEP 1: After going to your wallet, click on the market icon. As you can clearly see that I have 16.8956 USDT in my account that I'll use in this trade.
Then type TRX in the search bar and click on the first pair TRX/USDT.
STEP 2: After selecting the pair click on the buy button present at the bottom in green colour. And select limit order from the order menu.
STEP 3: Now fill in the order price and press Buy TRX. As we're making a buy limit order. I'll put a lower price so that when the asking price from the seller price will go low my order will be filled and the transaction will be completed automatically.
- You can see the transaction in open orders menu. It's showing the order has 0% filled as there is no price drop in the asking price.
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 steps 1 and 2 as I've explained in the above question. Click on Market, then go to the search bar and search for TRX/USDT pair and click on buy option in green colour down below.
Now select the market option from the same drop-down menu from which we've selected the limit option
- Fill in the amount that you want to buy and click buy TRX. I've bought 15.1 TRX.
Now, what happened here is the order was filled instantly as I'm purchasing the asset at market price meaning there is no difference between the bid price and ask price or we can say that the spread is 0. This is why the order is filled instantly.
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:
a) Calculate the Bid-Ask.
b) Calculate the Mid-Market Price.
According to the image above: - Bid price= 2.376USDT Ask price= 2.387USDT Mathematically, Bid-Ask =2.387 - 2.376= 0.011 USDT Mid-Market Price = (Bid Price + Ask Price)/2 Bid price = 2.376 Therefore, Mid-Market Price = (2.376 + 2.387 )/2 Mid-Market Price = 4.763/2 Mid-Market Price = 2.3815USDT or 2.38. You can also see this in the middle of the Bid and Ask price shown in the Image Above.
Bid-Ask spread = Ask price - Bid price
Ask price = 2.387
Bid-Ask spread is a very crucial part of the cryptocurrency world as it shows the difference between ask and bid prices which a trader can use to get an idea of the liquidity and trading volume of the asset that he's planning to invest on. Using this, the trader can predict the price movement and make buying and selling decisions accordingly.
With This Homework Task, the aspects of Bid-Ask spread become clearer to me. I also understand now who are market makers and takes and how are they responsible for liquidity changes in the crypto market,also I gained knowledge about the order book from Binance wallet, which is also a very important waller feature.
Being able to gather such knowledge, I am truly blessed and wanted to thank professor @awesononso to deliver such an amazing task.
That'll be all from my side.
Thank you for reading