How crypto markets work: order books, spreads, and order types

The market is an auction

A market is a list of people who want to buy and a list of people who want to sell. That is all it is. The list is called the order book.

Buyers post the prices they are willing to pay. These are bids. Sellers post the prices they are willing to accept. These are asks. The highest bid and the lowest ask never touch. The space between them is the spread.

When a trade prints, it means someone got impatient. A buyer paid the ask, or a seller hit the bid. Every trade needs one patient trader and one impatient trader. The patient trader gets a better price. The impatient trader gets certainty. That is the trade-off, and you make it on every single order.

The spread is a cost

The spread looks small. It is not small. If the spread is 0.05 percent and you cross it on entry and again on exit, you paid 0.1 percent for the round trip. Do that 500 times a year and you paid 50 percent of your account to the spread. Most beginners never do this arithmetic. The market does it for them.

On BTC the spread is tight. On a small altcoin it is wide. A strategy that works on BTC can lose on the altcoin for no other reason than the spread. Same rules. Different auction.

Order types

There are only two ideas. Everything else is a variation.

A market order says: fill me now, at whatever price is available. You get certainty. You pay the spread, and if your order is big or the book is thin, you pay more than the spread. The price you see is the price of the first contract. The rest of your order walks down the book. That walk is called slippage.

A limit order says: fill me at this price or better, and if the market never comes to me, do not fill me at all. You get a good price. You give up certainty. The hard truth about limit orders is this: they fill easily when you are wrong and reluctantly when you are right. If the market races away from your limit, that was probably a good trade, and you were not in it.

A stop order is a market order with a trigger. When price touches your level, the order fires. Traders use stops to exit losers. The stop guarantees the exit. It does not guarantee the price. In a fast move, the fill can be far beyond the stop level. Beginners learn this in a crash. It is better to learn it here.

Maker and taker

Exchanges charge two fee rates. If your order rested in the book and someone traded against it, you made liquidity. You pay the maker fee, which is low, sometimes zero. If your order crossed the spread and took someone else's order, you took liquidity. You pay the taker fee, which is higher.

The difference looks tiny. It is a few hundredths of a percent. But trading is a game of tiny numbers multiplied by many trades. A scalping strategy that pays taker on every fill usually has no chance. The same strategy paying maker might survive. The strategy did not change. The fee did.

Depth and liquidity

The order book has a shape. Near the current price there are many orders. Far from it there are few. The amount of size resting at each level is called depth.

Depth decides how much your order moves the market. A $500 market order on BTC moves nothing. A $500,000 market order on a thin altcoin moves the price against you before you are done filling. You are buying from sellers at worse and worse prices. Your average fill is worse than the screen price. The screen price was never available for your size.

This is why position size belongs in your strategy and not in your mood. The market charges big orders more. It always has.

Why any of this matters to a systematic trader

You will build strategies, test them, and deploy them. Every concept on this page becomes a line item against your profit:

• The spread taxes every round trip.
• Market orders pay slippage. Limit orders miss trades.
• Taker fees compound. Maker fees compound slower.
• Thin books punish size.

A backtest that ignores these is testing a market that does not exist. See realistic backtesting for what that costs, and trade quality for how to measure whether your fills are any good.

How Edgecraft handles this

Edgecraft models the auction, not the chart. Backtests account for spread, slippage based on book depth, maker and taker fees per venue, and the size of your orders. The number you see at the end already paid the costs on this page. That is the point of it.