To understand these concepts, we need to return to the basics of what a marketMarket A place where assets are bought and sold. is: it is simply the meeting point of supply and demand aimed at setting a buy/sell price. On one side, there is the demander (buyer) who seeks to minimize their purchase price, and on the other side, there is the supplier (seller) who seeks to maximize their selling price.
The bid-ask spreadSpread The difference between the highest bid price and the lowest ask price on a market.
In cryptocurrencyCryptocurrency A digital currency based on cryptographic technology to verify and secure its transactions and control the supply. A blockchain is used to store transactions transparently and verifiably. markets, the bid-ask spread represents the gap between supply and demand during the exchange of a tokenToken A digital asset issued on a blockchain, representing various utilities, rights, or value. or cryptocurrency. It is symbolized in an order bookOrder Book A book displaying buy (bids) and sell (asks) orders on a market. that lists all buy and sell orders. In other words, it is the difference between the minimum price at which a seller is willing to part with their assets and the maximum price that a buyer is willing to pay to acquire them.
To simplify, let’s use an example: suppose you have an apple that you want to sell, and you estimate its value to be €10. Your friend Pierre, on the other hand, thinks it is worth a maximum of €8 and wants to buy it. In this situation, the bid-ask spread is €2. It is simply the difference between the highest offer and the lowest demand in the market.
Bid-AskAsk The price at which a seller is willing to sell a cryptocurrency on a market. Spread = (Minimum value at which the seller accepts to sell) – (Maximum value at which the buyer is willing to buy)
However, there are nuances and differences depending on the type of cryptocurrency you want to buy or sell. Indeed, it is first important to think in terms of percentage: a $3 difference in the price between buying and selling Bitcoin at $30,000 represents a 0.01% spread for someone buying. This will not have the same impact as a spread of the same amount for a cryptocurrency like BNB (1% spread), which is currently trading around $300.
That said, not all markets have the same spread, and a single assetAsset Any digital asset, including cryptocurrencies.’s spread can vary depending on the volume present on the pair at the time of buying or selling a cryptocurrency. Generally, the more “liquid” a cryptocurrency is (i.e., having a high trading volume), the smaller the spread will be. This is why assets with low liquidityLiquidity The ease with which an asset can be bought or sold without affecting its price. are usually more volatile.
You might be wondering where this price difference goes.
Who benefits from this commission on each trade executed in the markets?
To put it simply, it’s the market makers who benefit. Their job is to take advantage of these spreads to generate profit. Indeed, the price of an asset can differ depending on an exchange (centralized or decentralized), so there are sophisticated players or firms seeking opportunities to buy or sell to generate profits. Market makers operate in all markets: traditional and crypto.
Centralized Exchanges (CEXCEX A centralized exchange platform controlled by a single entity.) such as Binance, FTX, Coinbase, etc., use fees deducted from bid-ask spreads to generate profits. They therefore take a portion of each transaction from their clients. Essentially, it’s a fee for connecting buyers and sellers and providing the liquidity necessary for the transaction. You may already know, but they are not the only ones offering this type of service.
Decentralized Exchanges (DEXDEX A decentralized exchange platform without a central authority, often using AMMs to enable trades.), on the other hand, operate slightly differently. They typically use Automated Market Makers (AMMs) to ensure smooth operations. These AMMs act as regulators on decentralized trading platforms through smart contracts that continuously manage trades to maintain as much liquidity as possible.
How to Use This Information?
Now that you understand the concept of the bid-ask spread, how can you put this knowledge to use?
First, it is important to always keep an eye on the trading volume of the cryptocurrency you are buying or selling. For example, a “blue-chip” asset like Bitcoin or Ethereum has much higher daily volume compared to a cryptocurrency in the top 200. Volume is also important because it might be beneficial to wait for a volume spike to buy or sell your cryptos, in which case you will pay less in bid-ask spread fees.
Next, it is essential to ensure you do not place a market order when trading on CEXs, as you will incur much higher fees for executing this operation compared to a limit order.
