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Scenario 1:

I bought k bitcoins at unit rate X in the past, with amount A. If I want to sell them now, I look at three unit prices:

  • Buy Price
  • Sell Price
  • Spot Price

Question # 1: At which price I will be selling the k bitcoins that I have?


Scenario 2:

I have A dollars with me and I want to buy bitcoins with it. I am looking at 3 unit prices:

  • Buy Price
  • Sell Price
  • Spot Price

Question # 2: At which of these unit prices I will be buying the bitcoins?


For the sake of understanding, lets say I am using either Coinbase or GDAX

List item

to buy/sell in both above scenarios.

Thanks

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Scenario 1

Using a simpler example, if you visit bitcoin.com.au to sell Bitcoin you will get the sell price for k Bitcoins. In this example, it is a spot sell price.

Scenario 2

Using a simpler example, if you visit bitcoin.com.au to buy Bitcoin you will pay the buy price for k Bitcoins. In this example, it is a spot buy price.

Elsewhere

On market exchanges, the buy and sell price are market indicators. These are the general level of the buy and sell orders. You can creae a buy or sell order for, usually, any price you like but the indicators show current trade values.

If the exchange lists a spot price, this is usually their spot buy price, for if you wish to sell to the exchange directly without creating a market order and waiting.

  • Simpler exchanges which offer direct buy/sell will usually try to avoid holding a position. Although it's not visible, their orders are usually backed by larger market makers, who rely on order books from multiple exchanges (which is why you see larger spreads when buying on Coinbase vs GDAX, since Coinbase will try to ensure an order will go through by going deeper into the order book than GDAX, so that other users' trades will not usually impact each other instantly) – Raghav Sood May 19 '18 at 0:55
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It depends on if you are adding or removing liquidity from the market. i.e., if you are placing limit or market orders.

Order books are divided into asks and bids. An ask is the lower price that someone is willing to sell their asset for, and a bid is the highest price that someone is willing to pay for an asset.

An order is executed when an ask is matched against a bid, or vice-versa. If you enter an order for which the corresponding liquidity is already available, you are effectively placing a Market order - It will be executed immediately.

If you enter an order that is far enough from the ask/bid to execute immediately, it is a limit order. You will end up with an entry in the order book, and someone has to place an equivalent order at your price (but in the opposite direction) before your trade goes through.

For example, Alice has 1 BTC and is willing to sell it for $1000. Bob has $990, and is willing to buy 1 BTC.

The order book in this case has an ASK of $100, and a BID of $990. Since there is no match between the ask and the bid, no trade happens. These are limit orders, which means they will only execute at that price.

Now John comes in and puts an order to buy 0.5 BTC at $1000. Since Alice is already offering 1 BTC at this price, half of her order is filled, and all of John's order is filled immediately. Since this is removing liquidity, it is essentially a market order (even though it was placed as limit). The order book is now ASK 0.5 BTC @1000, and BID 1 BTC @ 990.

Now let's say Smith comes in and places a market order for 1 BTC. When placing a direct market order, you don't specify a price. You will automaticaly trade at the lowest ASK/highest BID depending on the direction of your trade.

Since our order book only has 0.5 BTC available for sale, the 1 BTC market order only fills 50%.

In short, the price depends on the type of order you use, and how much liquidity there is in the market. The spot price is simply the last price a trade was executed at, and there is no guarantee that there is liquidity available at the spot price (the last trade may have consumed all the liquidity).

  • Its so confusing. Let me re-iterate. In an exchange scenario (lets say coinbase.com), I am getting three unit prices like (buyprice, sellprice, spotprice). I have k bitcoins with me. At what price of the three i will be selling my k bitcoins? Similarly, if I have $$, at what price of the three will I be buying bitcoins? – khan May 18 '18 at 22:13
  • It depends on how much is available for sale/buys at what price. If you are selling more BTC than people are buying at a particular price, you will either not be able to sell all of it, or sell parts at different prices, lowering your average sale price (this is known as slippage). The same thing works in reverse when buying – Raghav Sood May 18 '18 at 22:17
  • Hmm..but being a consumer using an app, it shows me a price at which i can sell or buy. What is that price in the case of a buy, and what is that price in the case of a sell? – khan May 18 '18 at 22:34
  • That would depend on the app, how deep their order books are, whether they impose an artifical spread, and a number of other factors. It's really difficult to explain this for specific apps. I suggest you read some guide on how markets are made, it would clear it up a lot better than trying to explain in comments. money.stackexchange.com might also offer some better insights – Raghav Sood May 18 '18 at 23:44
  • @khan If I go to bitcoin.com.au and sell Bitcoins I get the sell price for k bitcoins. If I buy, I get the buy price for k bitcoins. Elsewhere, they list the market buy and sell price, where you can register a transaction and wait for the market to pick it up. In that case, the spot price is usually how much the exchange is willing to pay to buy directly. – Willtech May 18 '18 at 23:54

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