If you’ve ever been involved in trading or financial markets you will have heard the terms “bid”, and “ask.” How can you learn more about these terms and increase your profits?
The Bid Price
The “bid price” refers to the fact you are bidding X amount to purchase an asset. Your bid will determine who wins the asset. The highest price you can buy an asset at is what you’ll see on price aggregators and exchanges.
The bid price refers to the highest price a market participant will pay for an asset.
Understanding the Bid price
You are selling an asset at its current market price, which is the price that the asset appears at when it is viewed on an exchange. This is the maximum asset price that can be sold at the moment.
The Ask Price
The term “ask price” refers to the fact you are asking for an asset at X price. You will be granted the deal if your asking price/sell/offer price is lower than the market price.
The ask price refers to the lowest price at which a market participant will sell an asset.
Understanding the Ask Price
You can buy an asset at the market price — place a order on the exchange — this means that you are buying it at its selling price (ask). This is the minimum price an asset can be purchased for.
What is the difference between a bid price and an ask price?
The ask price will always be greater than the bid price by definition. The bid-ask spread is the numerical difference between ask and bid.
Definition of the Bid-Ask Spread
Source: River Financial
The bid-ask spread simply refers to the difference between the highest possible price for an asset (bid), and the lowest price at which it can be sold.
The bid-ask spread does not reflect price movements for an asset. It simply shows market activity and volume. The difference between the ask and bid prices is smaller the more trades there are.
Who benefits from the Bid-Ask Spread
The bid-ask spread is available to all market makers. These market participants offer and bid on a price. Each market maker adds liquidity and depth to the market.
Let’s take Alex, a trader, as an example of how a marketmaker can make money from bid-ask spreads. He quotes a $10 buy order and simultaneously opens a $11 sell order. The market maker’s profit is equal to $11 – $10 = 1.
It’s not easy to be a market maker and it’s certainly not something you should do.
What does it mean when the Ask and the Bid are close together?
Spreads are smaller, which means that assets have greater liquidity. This also indicates that there is a high demand for the asset. A narrow bid-ask spread, also known as “narrow,” makes it easier for new players to enter the market.
Spreads are more profitable than smaller spreads. Trading can be a time-consuming and difficult activity, so it is worth taking a greater risk to make more profit.
Example of a Bid and an Ask
Let’s say Emma wants to purchase Bitcoin on an exchange. Emma can see that BTC trades in the $35K to $37K range, but she doesn’t want to spend more than $35,000. She places a limit order at this price. Her current bid price is $35.5K
Simon, on the other hand is looking for 1 BTC to sell because he recently discovered his old crypto wallet. He compares prices and decides to sell his Bitcoin at $37.5K. This is his asking price.
These are the lowest/highest Bitcoin prices that anyone would be willing to buy/sell Bitcoin at on the exchange. The bid-ask spread is $37,500 – 35,500 = $2,000.
Disclaimer: This article does not contain any investment or financial advice. This article does not contain trading or investing advice. This information is provided without warranty as to its accuracy, reliability, and completeness. High volatility and occasional arbitrary movements are common in the cryptocurrency market. Before making an investment, any investor, trader or regular crypto user should investigate multiple perspectives and learn all applicable regulations.
What is Bid and Ask? Cryptocurrency News & Trading Strategies – Crypto Blog By Changelly.
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