Exchange Trading Fundamentals

This article is the first part of an introduction to exchange trading. I wrote this guide for some friends at FuzeX that wanted to get into cryptocurrency trading but were confused by the terminology. The second part is Market or Limit. Ask, bid, spread, order book, and liquidity are introduced in this article.

The first visit to Bittrex, or any other major cryptocurrency exchange, can be a bit overwhelming. The panic arises from not understanding a few of the fundamentals of cryptocurrency exchange trading. Having a basic intuition for the significance of the ask price, the bid price, the spread, the order book, and exchange liquidity will remove some of the anxiety that accompanies trading cryptocurrencies.

The Ask

An exchange is a marketplace. It matches buyers and sellers. In some sense, the exchange functions a bit like an auction. In an auction, the seller has something, an asset like bitcoin, that they want to trade for something else. That something else is usually currency, but it could just as easily be goats or chickens or any other asset the buyer has to offer that the seller will accept.

Goats. Photo by John Bakator on Unsplash

The seller will already have in mind a price that they are prepared to accept before they will part with their asset. That price is called the reservation price. It is the lowest price they are willing to accept…