Exchanges, Order Books, Slippage, and Walls — Oh My
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This blog post includes:
What to look for in an exchange
Liquidity — Slippage — Order Books — Walls and Whales
Security
Reliability
What To Look For In an Exchange
This article focuses on exchanges, which are the most important entities in this market. Using a proper exchange with the right features is a must. The top three things to look for in an exchange are as follows:
- Liquidity
- Security
- Reliability
Exchange Liquidity
The first and most important item is liquidity. Liquidity means how many users, money, assets, etc. are on the exchange. You want someone on the other side of your trade when you want to buy and sell — and you don’t want to overpay or sell at a loss. Lack of liquidity is one of the main causes of slippage.
Slippage
Slippage is when you want to sell, but nobody else will buy at that price. It doesn’t matter what the price is elsewhere; if the exchange you have your cryptocurrency assets on doesn’t have people wanting to trade for that price without you taking a ding of 5%, then that is the kind of exchange you want to avoid. To look for slippage, check out the volume of the exchange. Most exchanges have volume data available and coinmarketcap has this data as well.
https://coinmarketcap.com/exchanges/volume/24-hour/
Slippage is, in most cases, a bad thing for you. However, if you are on the other side of someone else going through slippage, you can profit from their result. If you have orders on the order books (more on those in a bit) and have a buy order much lower than the current price, you may get a good deal on a cryptocurrency of your choice. It is, however, a waiting game, and in most cases not worth it, as your order has to be backed by real assets or money, and it is just sitting there useless in the meantime.
With the volume and order books in mind, the next item to look at are the order books.
Order Books
All exchanges have a public or private order book. An order book is where all orders go that people (or bots) place. A public order book is just as it sounds; all orders in it can be seen by all users. A private order book could simply be orders hidden from the public order book or orders that come into effect at a certain price; alternatively, it might be completely hidden — you say “I want 100 dollars of BTC” and the computer backend gives you a quote. In all cases, an exchange requires you to back these orders with your actual assets. This means if you have $10,000 dollars, and you want to buy BTC, you can place a $10,000 buy order at X price for BTC. However, while it is on the order books, you cannot simultaneously place a $10,000 order on ETH as well at a set price. If you want to do something like this you will have to manually manage your money, or have something to give you an alert or trigger. This is why it is almost useless to have money sitting in orders waiting for wicks of slippage.
Here is a screenshot that describes the phrase “wicks of slippage.”
As you can see, the price was returned very quickly to a price that most traders agreed upon. One or multiple people could have been selling too many at once, or sold in a panic or frustration.
One other thing to know about order books is that some have hidden orders, or there may be conditional items that cause orders to come from nowhere. This is one of the main reasons why looking at an order book isn’t a good idea of what is actually there. You know that what is on the order books is actual cryptocurrency and money, but you don’t know what you don’t know. An order book may be deceptive or it may have conditional orders (such as if price gets to X, place an order of Y). Here are some pictures of order books to give a reference of what an order book looks like.
Poloniex
Quadriga
Binance
Bittrex
Walls and Whales
When there are a cluster of orders at a certain price, it’s called a wall. Usually they are caused by people being attracted to round numbers (such as 200, 1000, or 20,000). Associated with walls are whales. These are usually people that have a lot of the cryptocurrency or money, and can create a wall themselves and influence the market. What makes someone a whale is subjective; depending on the coin, it could be someone with $100,000 or someone with millions.
Walls and whales are a hurdle to get through in order for the price to continue in either direction. This is because you need either significant capital or assets (e.g. BTC) to be able to purchase all or sell all of the asset so that the price can move further. If there is an order totaling $2 million CAD that is selling BTC at $10,000 CAD, you need many people, or a whale, to buy $2 million CAD worth of BTC in order for the price to become higher than $10,000 CAD.
Here are some examples from the orders books that I would consider walls or whales.
Quadriga Whale
Binance Order Book Wall
Please remember when placing orders, and when looking at these, that anyone can cancel their order at any time. This means that if we get close in price to their orders, they can be pulled and we can pass through that price. That goes for any order on the order books. Nothing is set in stone until a trade is actually processed.
Exchange Security
The next item to look for in an exchange is security. This means how secure the site is, which means holding cryptocurrencies in cold storage (offline wallets that aren’t attached to the network and theoretically unhackable), or using HTTPS with two-factor authentication (Google 2FA or other), and sometimes using a captcha or other type of password spam prevention. If you plan on using an API (a way to hook up a portfolio or trade manager software), there should be a way to disable withdrawals from those keys, and better yet, only allow withdrawals from certain IP addresses.
Security is a two-way street; it is both your and the exchange’s responsibility. You have to protect yourself as much as they have to protect the assets they hold on your behalf. Since nobody can help you if things go awry, you always have to have security in the back of your mind. If you lose your security device, you may have a hard time trying to get back to the funds, as exchanges deal with scams, fraud, money laundering, and other types of money manipulation on a regular basis. To be secure, they may ask for ID or other verification, much like any secure location would.
If an exchange doesn’t have 2FA, cold storage, or has an insecure site itself, I would hesitate to place any funds there. In some cases, if you want an uncommon cryptocurrency, you may find yourself in a situation where you have to use an insecure exchange, and I advise that you get in and out as soon as you can. Remember that it is better to be safe than sorry, and don’t risk your entire portfolio on one exchange, especially on a insecure one.
Exchange Reliability
Exchanges handle many transactions in one minute, let alone within one day. A reliable exchange could mean the difference between having a good day, or having a bad “-25% on your entire portfolio” kind of day. If an exchange regularly goes down, it is a sign that they are unreliable. If they are unable to react to big moves, that could prove costly to you; it is unfortunate in the crypto space when exchanges have downtime and you can only sit there and hope the price hasn’t changed too much when it comes back. Another bad scenario is if you have orders on the books and are unable to cancel or move them when the price moves.
Many exchanges have a referral system. While this may not seem related to reliability, make note how the referral system works. Some will be too good to be true, like an APR (annual percentage rate) of 10% just for holding BTC on their site (usually locked up). While these may seem like great and easy returns, do not be deceived. Always question where they are getting 10% of the money from. Some exchanges use your BTC to try and trade the market, risking your investment without your knowledge. If things go wrong for them, they will probably go wrong for you. I personally do not trust an exchange to hold my money if they can offer an APR or a guaranteed return.
Exchanges usually give a discount on fees to referrers or a percentage of the referred user’s fees. These are common and are totally fine from my point of view. Most exchanges don’t have the time or the marketing money to target the correct audience, and rely on word of mouth to spread news of their awesome exchange. Essentially, they use some of their marketing money and give it to those that spread the word. Much like anything, though, people may become greedy and start spamming the referral links wherever you look. This isn’t what they are meant for, and are usually spammed by people who just want a quick buck, fishing for people to sign up. If people offer support or give advice, it is common to see a referral link below, as that person has spent time creating that content.
Common Canadian Exchanges
The following table shows common online exchanges used by Canadians.
Of course, there are other places to buy and sell cryptocurrencies. Some of them are in-person and over-the-counter,, and some consist of a service such as a broker that you can send money to and get cryptocurrency at a certain rate. There are also many new Canadian exchanges that have come, as well as some that have struggled and gone. The exchanges above are the most common and therefore the most liquid for Canadians to be on.
There are also decentralized exchanges, and some of the main exchanges are working towards becoming decentralized. Decentralized exchanges cannot (theoretically) be down, or be shut down by a single company, much like Bitcoin itself cannot (theoretically) be taken down. However, until decentralized or over-the-counter exchanges can be deemed reliable, I will not be covering them in any of my articles.
Takeaways
In this article we looked at exchanges with three main points to consider: Liquidity, Security, and Reliability.
- Liquidity is key when trading. You want many people to trade against to prevent slippage.
- Security can take several forms on an exchange, and is a two-way street between you and the exchange.
- Reliability of the exchange depends on up-time. Consider the validity of referrals and promotions.
- Research and review multiple exchanges before placing your hard-earned money in them.
