If you’re new to cryptocurrency investing then you may be confused by the fact that the cost for crypto coins or tokens can sometimes greatly vary between different exchanges or even different trading pairs! This is because every platform has its own order book that must be reconciled between the buys and sells for that particular asset and for each pairing.
For that reason, the cost of certain assets can vary dramatically between exchanges. Some smart investors even use this to their advantage arbitrage the prices between these services for quick profits. In this article, we’re going to talk about how cryptocurrency exchange order books work and how you can take advantage of these cost differences.
Even if you’re not interested in using the arbitrage method to make money, it’s still important to keep tabs on these changes to make sure that you’re not overpaying or undercharging when you buy or sell your investments on a trading platform.
Even small discrepancies in this number could cost you when you look at the big picture. A few cents here and there on thousands of cryptocoins can add up to a substantial chunk of change! First, let’s learn how the order book works on these exchanges and what the terms here mean.
The buy price for a certain asset is the amount that people are willing to pay for it at that given time. In many cases, people or even bots will strategically change their offers in order to take advantage of the market. When you submit a buy it is placed in the order book, and then whatever the highest price someone is willing to buy for becomes the “market prices” for the different coins on the exchange so to speak.
For some assets, this cost can fluctuate greatly depending on how actively investors are exchanging that token. As a result, you’ll likely find much smaller differences between the price of large-cap coins on trading platforms than you would with small-cap coins.
Investors should keep in mind that the order book only shows people’s offers, and for a better representation of what people are actually willing to pay you should see the trade history instead. This will tell you of any recent trades that have occurred, and it may give you an idea as to whether you can offer more or less for your assets.
The order book is just a bunch of people haggling over the price of particular cryptocurrencies and trying to get their peers to either offer more or less for them so they can secure a profit for themselves.
Much like the buy price, this is what people are willing to sell their assets for. Every website and even every trading pair has its own sell book. The users participating in that particular market determine the sell price. That means that depending on what activity is going on at the moment on the exchange that the cost here could be significantly different than on another service for the same asset.
Once you submit a sell order, it goes into the book, and then the software tallies these up and presents the lowest sell price as the current market value. If someone is desperate to sell their coins or tokens on that particular exchange then the prices of that asset will go down. For that reason, this can sometimes cause value discrepancies on one platform that do not exist in another.
Investors should keep in mind that cryptocurrency trading volume also tends to have an effect on the value of the asset in question. Sites with lower trading volume tend to have the largest trading discrepancies. That’s because with less coins to go around, it may be harder for the prices to even out.
Less trading volume gives people more liberty in choosing their own selling cost, especially within smaller trading pairs that not many people are using. That means a moderately sized holder deciding to dump their bags on the exchange could have serious effects on the price of a coin, even if only in the short term. This does, however, present an interesting opportunity for savvy investors who are looking for a bargain!
I’m sure it didn’t take you very long to figure out that it could actually be a financially viable idea to take advantage of the difference between the value on these exchanges or even between two trading pairs. This is called arbitrage, and there are tons of people who do this everyday to make money in various markets.
At any given time there can be a price fluctuation of a few cents or possibly even more sometimes on a particular asset on different platforms. This is most notable with lower value assets which tend to have the biggest price swings due to their lower trading volume.
In order to find these deals, there are a number of tools online that can help you do this. If you look at various cryptocurrency aggregator sites, most of the time they will list this data for you in their exchanges section.
In most cases, each coin or token will have the exchanges its currently traded on listed, and next to each of those entries will be the current trading volume and the price the asset was last reported trading at on these platforms. Using this information you can easily purchase those cryptos for a lower cost on one exchange, and then flip them on a higher priced market for a profit.
In many cases, the profits here will be very small. You’ll only earn perhaps a couple of cents per token, but the idea is to do enough of these trades so that they add up in value. This can, of course, be easier said than done, because there’s a ton of other people also looking for these deals.
That means that your window of opportunity for flipping these coins is very small unless you want to hold them long term of course. This can be particularly tricky on some exchanges with slow funds transfer times, as by the time you get your money confirmed to buy the coins, someone else may have already scooped them up.
The name of the game here is speed, and if you want to play the arbitrage game then you’ll need to take the time to learn how to identify great deals and be in the right place at the right time to take advantage of them.
As an investor, it’s up to you whether this method is worth your time, but it is a possibility, and if you enjoy watching the market for bargains then it’s a decent way to make yourself a little income. It can be an exhausting endeavor if you don’t actually like watching exchange information like a hawk, and if that’s the case you may just want to buy and hold some coins and forget about this mess. It’s obviously not for everyone.
In closing, it’s important to look at a variety of exchanges before making any cryptocurrency purchase. This can help you make sure that you’re actually paying the fair market value for these assets and not an inflated price.
This is extra important for low market cap coins because even relatively small buy or sell orders can skew the market prices in one direction, and that means it’s easy to either pay too much for a coin or even sell for too little if you’re not paying attention! The “market price” is not always telling you the whole story, and it would be in your be interest to learn how to read what these trading platforms are telling you.