Understanding Crypto - Orders
We have covered a lot of things in these blogs. Explained how wallets work, how to get free assets, what is the difference between exchanges and many other things. Now, before you read any further, please read through our post that talks about the basics of trading. Because this is the moment where we start dealing with real trade, real money.
What we are going to talk about are the various ways you can purchase the coins. In an online shop like Amazon you just press “buy” and that is all, there is no negotiation on the price or time. On the other hand, coins follow the rules of the stock market. Because of that, most things here will be applicable to coins as well as to stock markets.
What is an order?
An exchange is a place that helps two people meet. The buyer and the seller. The seller wants to sell for a high price, the buyer wants to buy for a low price, but the actual price is usually set by the buyer, as they are the ones to decide if the deal actually goes through. The “cost of a coin” depends on the last transaction that was done. If a seller thinks the coin is worth a dollar and the buyer buys it for a dollar, then the coin costs a dollar. But if the seller thinks the coin is worth a dollar, but a buyer wants to buy it for 40 cents, it isn’t worth a dollar. At that point and time it is worth just 40 cents. These both orders never meet and never execute.
If these are the only two people in the whole market, the price will always stay as 1 dollar, but there will be no actual trades happening. In a real market there are many buyers and sellers, they each have their own needs and expectations, so their prices often meet. An optimist buyer will buy all the stock of the pessimist seller. Maybe the seller just needs money right now. Maybe they want to invest somewhere else. Maybe they have misunderstood the latest news. So they sell for 80 cents to leave fast, placing the order in the market, where it meets many buyers who are willing to buy it for 90 cents or less. The point is - the price of the coin does not show the worth of it. It just shows the last trades.
A market order is best used in very active markets with little price fluctuations. It is basically an order placed in the market stating: “I want this amount of coins now.” So you see that the coin is going for a dollar, you enter that you want 10 of them and you buy 10 coins for 10 dollars. The simplest, fastest and easiest way to purchase, no doubt about it. Just be careful. It means you will buy 10 coins for whatever they are sold right now.
If the market is slow and there aren’t many traders willing to trade, the “last price a coin was sold for” can be misleading. Maybe there is only one guy willing to sell it for a dollar now. You place the order to buy 10, but only one is bought for that dollar. The next seller is not willing to sell it for a dollar anymore, but for 1.20 or 1.50. And the guy after him is selling the coin for 2 dollars. So you place the market order to buy 10 coins and it will get executed with the market price. Suddenly what you thought was going to be a 10 dollar purchase for 10 coins has turned into a 25 dollar purchase for 10 coins.
A good comparison would be buying fruit. If apples are common in your country, you can enter the market and just grab 10, already knowing what the price will be, as the competition is fierce. But if you will just throw 10 exotic fruits in your basket, the price might shock you. Even if you did do that just a month ago, the season has changed and they are expensive now. So it is best to place market orders when you are sure that the market is active, liquid and with a high volume, as it is the fastest and riskiest way to enter or exit the market.
This is the patient way, the patient approach to coin trading. This is when you say “I want to buy these coins, but not for 1 dollar. I will buy them for 0.50.” This means that the speed is not the main goal, the main goal is the price. If the market is volatile, it can drop to that price and your order gets executed. You have bought the coins for 0.50. Of course, the opposite can happen and the price of the coin doesn’t drop at all and only keeps rising. In that case you will never be able to enter the market, just sit there and wait for that magical 0.50. So always put in realistic numbers.
Sure, you might think that you do not even want that coin, but you would take it if it drops that low. You do not care about the coin itself, just for the opportunity. But that is also dangerous for a different reason. You see, you might put that limit order and forget about it and not pay attention. Suddenly the whole project collapses for some reason and everyone is trying to cut their losses and sell their coins. Your limit order set 4 months ago will be the only one that buys the coins due to you setting it and forgetting about it. So you will open your exchange just to see that you have bought 100 coins for 0.50 that are now worth 0.02.
A stop order is something that is usually placed if you want to exit the market. What it is essentially is a “market order” on a timer. Everyone will always suggest that you set a “stop loss” order. It means that you have the coins in your pocket. They cost 1 dollar as in the previous examples. But you feel that the price is inflated and the bubble is going to burst. For some reason you do not want to exit now, the reason probably being greed, which is understandable. So you set an order in the market that says “Sell all these shares for the market price, but only when the price drops as low as 0.90.” That way you can rest more or less comfortably, knowing that you will get a pretty high return anyway, even if the bubble bursts and you are not at your computer to sell the coins manually.
What can happen in this case is that it could be just a fluctuation. Maybe it was a big sell order for 0.90 from someone else who just wanted to take his profit and leave. So his decision has suddenly triggered your stop loss order and everything you have has been sold, only for the price to return to previous levels or higher in the next minute.
Of course, as with everything, the more you explore, the more you find. There are many more types of orders and additional modifiers an order can have. For example, there are stop-limit orders, meaning that they will execute when triggered, but only to a certain point as with a default limit order. Or you can set an order selling 10 coins, but the order only to be executed if you can sell them all for the same price. The more you look into it, the more detailed the orders can get.
That is why there is no reason for you to know it all instantly. This blog was written for the purpose of you understanding these three things:
1) Buying “market price” is straightforward, but is a risky thing to do.
2) Usually try to buy with a limit order, at least when you are starting out.
3) Set a stop loss if you feel that the market is too shaky for your tastes.
And the single advice given always, no matter what the orders are - always be careful and never invest more than you can afford to lose.
Thank you for reading our blog. If you have any questions about the topic or want to suggest a new one, please write an email to [email protected].