Common Misconceptions For New Entrants To The Crypto Space
It would not be unheard of for newcomers to the exciting world of cryptocurrencies to be overwhelmed with questions. Why does the price of BTC vary on different digital asset platforms? Would having large trading volumes mean a platform’s liquidity is sound? Can slippage be avoided by trading on a high-volume exchange?
Many aspects such as cryptocurrency prices, trading volumes and liquidity are often misinterpreted by traders. The following aims to counter frequent misconceptions about cryptocurrency trading.
Read below to find out more.
🔹 1. Is Bitcoin’s price uniform across all exchanges?
Bitcoin’s price will vary across different exchanges, the same way there is no one global price per barrel of oil or per litre of gasoline.
Such price differences can mainly be attributed to arbitrage. Arbitrageurs function by buying a certain amount of an asset at one exchange and subsequently selling these assets at another exchange, profiting from the price difference in the process. Such behaviors also help narrow the price difference across different platforms.
Due to the dynamic correlation between supply and demand in each region, exchanges located in different parts of the world might offer differing Bitcoin prices.
🔹 2. Do large orders equate to high liquidity?
Liquidity is a measure of how convertible an asset is to its market value. An asset can be termed a liquid asset if it can be quickly converted to another asset at its market value.
Order depth alone does not indicate that an asset is liquid, as the bid-ask spread needs to be considered. For example, a buyer places a $1 million buy order at $100, and a seller places a $1 million sell order at $900. Despite the large volume of both buy and sell orders, the price in such a scenario would be hung at polarized price points, creating large bid-ask spreads. This would make it impossible for participants to trade at reasonable prices, deeming the asset in question highly illiquid.
In general, highly liquid markets are able to absorb large buy and sell volumes, while at the same time ensuring lower price volatility. Therefore, when choosing a trading target, users must first check whether the asset has trading depth and high liquidity, so as to avoid the problem whereby a transaction cannot be completed at the market price due to insufficient liquidity.
🔹 3. Is there a lower risk of slippage occurring in markets with high trading volumes?
Slippage refers to the difference between order price and final transaction price. Would assets that typically enjoy high trading volumes be at a lower risk of suffering from price slippage? The answer is yes. Active markets with high trading volumes typically lay claim to large quantities of both buying and selling orders across different price ranges. This high order density will often result in the narrowing of the price gap between bids and asks.
To properly measure how many buy and sell orders there are during a given time frame, traders are advised to check the depth of buy and sell orders. The depth chart shows the buy and sell volume each price point can support. Assets with insufficient depth would face difficulties maintaining price stability.
Price volatility occurs when an order with a quantity greater than the amount of the asset available at a current bid is placed. As all available volume at the current bid or ask price level will be allocated toward fulfilling the order, the next, higher price level will be executed until the order is completed. Such a process will result in individuals entering or exiting positions at prices higher or lower than expected, causing extreme price fluctuations.
Seller A sells 5 ETH at 1 USDT each, while Seller B sellers 3 ETH at 2 USDT each. Should a buyer request to buy 6 ETH at the market price, the order will be fulfilled with 5 ETH at 1 USDT from Seller A, and 1 ETH at 2 USDT from Seller B. In this case, all ETH priced at 1 USDT would have been bought and the market price of ETH would rise from 1 USDT per ETH to 2 USDT per ETH.
In such a case, slippage in the price of ETH would be inevitable, regardless of past volumes. Only by analysing the depth of each price point would buyers be able to make more informed decisions.
As one of the world’s leading cryptocurrency exchanges, Huobi Global has led the cryptocurrency industry in the spot and derivatives trading spaces for many years and is famous for its excellent liquidity and robust risk control system. Traders and investors are guaranteed minimal slippage and can enjoy healthy order depth when trading or purchasing digital assets.