April 02, 2020
Limit Orders vs Market Orders (Crypto Edition)
LET’S SET THE STAGE
Here we are going to focus on the mechanics of buying and selling cryptocurrencies on the open exchange. Specifically we will identify the two most common methods of order execution and they are Market orders and Limit orders. Placing orders on cryptocurrency exchanges mirrors buying and selling stocks on traditional platforms, for instance on E*TRADE. There are some differences between the cryptocurrency market and traditional financial markets like the US stock exchange. One attribute that is completely unique to cryptocurrency markets is that they operate globally 24/365. Crypto markets never sleep, and this unmatched accessibility offers nonstop action for those invested in digital assets. Another unique factor when looking to buy or sell cryptocurrencies is that there are hundreds of different exchanges to choose from. It goes without saying (but let’s do it just in case) be sure to conduct research on which cryptocurrencies are best to buy, and on which exchanges are the safest to buy them on.
LET’S TALK ORDERS
When buying and selling cryptocurrencies there are 2 fundamental methods investors use to execute those actions. Market orders value speed over price preference, whereas Limit orders favor the opposite. We aren’t going to spend time debating which method is superior to the other, because they are equally effective depending on the specific circumstances at the time of placing an order.
A good way to think about these orders is like choosing a rush shipping option when purchasing something from an online retailer. In our analogy consumers are willing to pay a premium for expediency and Market orders follow the same approach when buying and selling cryptocurrencies. Another example we can use is if you were in the market to buy a house, and paid asking price without any haggling. While the Real Estate example draws similarities in the behavior of the buyer the outcome of the transaction can vary wildly when placing Market orders to buy and sell cryptocurrencies. An investor can end up buying a cryptocurrency at prices higher than expected, or selling an investment for much lower than desired. This is so because a market order will not stop executing until it’s fully completed. One key factor that significantly determines the outcome of Market Orders is the liquidity of the cryptocurrency that an investor is buying or selling.
To learn more about liquidity on cryptocurrency exchanges click here (linked liquidity article).
Take the ethos of a Market Order, flip it on it’s head, and what you are left with is a Limit Order. Limit Orders only execute when a certain price threshold is met, and that means in some cases these orders are never completed. Let’s use the Real Estate example like we did before. Let’s say there’s a house for sale on the market for $400,000, but a buyer is only willing to pay $375,000 for the home. In some cases the seller would come down to the buyer’s price and the transaction is completed. In other scenarios the seller never comes down to the buyer’s price and the transaction never happens. Limit Orders give investors the control over the prices they pay when buying and selling crypto, but whether or not those orders end up completing depends entirely on the movement of the market.
Market orders provide a swift buying or selling mechanism for investors who care more about speed and certainty. Limit orders offer investors control over the prices they buy or sell cryptocurrencies for, but sometimes these orders are never completed. Both methods of order execution have their appeal, and knowing when to use them comes from understanding how markets work. Additional, factors like liquidity, bid-ask spread, and volatility all play a role when determining the best type of order an investor should place at any given moment. Taking the time to learn about those key market tenants will separate the winners from the losers.
Learned enough? Try placing an order on Beaxy now.