Trading cryptocurrencies has become one of the most profitable activities in fintech. It can be very speculative, and knowing what trading tools are available might help investors make better and less risky decisions.
This article gives an overview of different order types in crypto, similar to orders types used in stock trading. Still, they might be employed differently due to the peculiar crypto market structure and conditions.
In the early days of cryptocurrency, exchanges were generally referred to as the ‘wild west’ due to the propagation of unregulated and risky businesses, culminating in the infamous MtGox hack of 2014.
After Satoshi Nakamoto launched Bitcoin (BTC) in 2009, there were limited ways to trade the cryptocurrency with fiat currencies or goods. Mostly, trades would happen peer-to-peer (P2P) through the popular Bitcoin forum Bitcointalk.
These were risky operations, but Bitcoin was worth nearly nothing back then, so trusting a stranger did not matter as the money at stake was very little when compared to today.
Twelve years later, highly regulated and more reliable exchanges have taken over the crypto scene globally by complying with strict Know Your Customer (KYC), Anti-Money Laundering (AML) and Counter-Terrorism Financial (CTF) laws.
The cryptocurrency exchange market is finally worth billions of dollars, with exchanges collectively executing over $50 billion in daily trades.
Nowadays, cryptocurrency exchanges compete to offer traders a range of tools to make the best trading decisions to maximize profits and contain losses.
The different order types for cryptocurrency trading are designed to help traders execute an order to buy or sell an asset at the time and price that best suits them while reducing costly mistakes.
With the advent of the internet and automated systems, ordinary retail traders in the crypto space can keep their buying and selling activity under control with no third parties involved, all while processing orders with extreme ease nowadays.
Long gone are the days when trading consisted of a series of actions and processes that could take hours, if not days, to complete.
Before going through the different cryptocurrency exchange order types, we look at order books that define the order visibility and how it ranks in the market.
What is an exchange order book?
An order book is simply a separated list of buy (bids) and sell (asks) open orders for a specific trading pair. It can be identified as a marketplace that anyone can join by placing a bid if they want to buy an asset or asking for a price if they’re going to sell it.
The open order stays in the order book until it’s canceled or someone accepts the bid or agrees to pay the asking price for the specific asset in the case of a sale.
Each trading pair, like BTC/USD or BTC/Ether (ETH), will have its order book.
What are the common crypto order types?
Different order types allow traders to buy or sell a cryptocurrency with a lot of flexibility, whether they want to target a specific selling or purchasing price or define the timing of the transaction.
Orders can live in a spot market where cryptocurrencies are traded for immediate execution or in a futures market where contracts are able to establish that an order is fulfilled at a future date.
Stop orders would enable traders to choose at which price the order should execute and are usually set to minimize losses if the price of an asset drops considerably.
A market order is an instruction by a trader to buy or sell a cryptocurrency at the best available price in the crypto market and provide instant execution. It is considered the simplest and most basic type of crypto order.
Crypto market orders are perfect for traders who do not wish to wait for a target price and, unlike all other orders, which are primarily based on the prospect that a price will hit the target, market orders are guaranteed to be fulfilled.
A crypto market order automatically matches the best available limit order in the order book, removing liquidity from it. Therefore, it’s considered a taker order, and it’s the reason why exchanges usually charge market orders a higher fee. Since market orders are executed instantly, they cannot be canceled, unlike limit and stop orders.
Slippage is a significant drawback of market orders. It occurs when large market orders usually match multiple orders in the order book and may be susceptible to unfavorable changes in price. In simple words, slippage happens when an order fills at a price lower than expected.
It usually happens because there isn’t enough liquidity to fill a large order at the desired price, so the next available lower price will fill in. If the order value is not very big, a price difference might not even be noticeable. However, if the size of the trade is considerable, slippage may represent a big issue.
Exchange liquidity can be a real issue in cryptocurrency markets, which has prompted many experts to believe that some volumes declared might be faked or inflated.
Generally, traders who would like to control their trading strategy better might consider using limit orders.
A crypto limit order is an instruction to buy or sell a cryptocurrency only at a price specified by the trader. It is best suited for the trader who can patiently wait for a price target to be reached.