We know it might leave you baffled to see that there are two different prices of the same cryptocurrency at any given time, the buy price being slightly higher than the selling price. However, this is not something that CoinSwitch Kuber or anybody else decides.
The buying price for every asset, including stocks and gold, will always be slightly higher than their selling price in their respective markets. This difference is universal and exists irrespective of any platform or market.
The reason for it being the nature of trading markets.
That said, before diving into the details of the buy and sell price, let’s first understand that the price of any asset is nothing more than its agreed price between a buyer and the seller.
For instance, how would you know that a Reliance stock is worth ₹2000 rupees? Only when somebody sells it to someone at that price and the other person buys it will you agree that a Reliance stock is worth ₹2000.
Why Is There a Buy and Sell Difference?
Coming back to the question, let’s say you have 1 BTC whose average price is ₹10, and now you want to sell it. Of course, you will always try to sell it at a higher price than ₹10, won’t you? Similarly, if you were to buy Bitcoin, you will always try to buy at a lower price.
Everybody will try to buy as low as they can and sell as high as possible. That’s how a market also functions.
How Does a Market Function?
Markets have millions of traders who are buying and selling simultaneously, and an order book records all the orders from them.
Anyone wanting to buy or sell an asset enters the market, looks at the asset’s average price, and places their order with the quantity of asset and the price they want to buy or sell it at.
The order book of the asset then records all the bids (buy orders) and asks (sell orders) for that particular order and arranges all the buy orders from the highest bid price to the lowest and the sell orders from the lowest sell price to the highest.
Let’s say BTC’s last average price is ₹10 and there are 5 buyers in the market; they will try to get it for as low as they can and hence place bids accordingly – ₹9, ₹6, ₹8, ₹8, ₹7. What the market will do is arrange all these bids from the highest to lowest value – ₹9, ₹8, ₹8, ₹7, ₹6
These will be all the prices at which you could sell Bitcoin. Bid price = Price that you can sell for.
Similarly, say there are 5 sell orders for BTC, people will try to sell as high as they can – ₹15, ₹14, ₹12, ₹11, ₹10, the market will arrange all these asks from the lowest to highest value ₹10,₹11, ₹12, ₹14, ₹15.
These will be all the prices for which you could buy Bitcoin. Ask price = Price that you can buy for.
Do you see how this automatically creates a buy and sell difference? If you were to buy 1 BTC right now, you would be able to buy it for ₹10, while if you were to sell it, you could do it for ₹9.
This difference between the highest price somebody is willing to buy an asset for and the lowest price somebody could sell it for is called price spread. In this case, it would be ₹10 – ₹9 = ₹1
Does Price Spread Exist in All Markets?
Price spread exists in all markets, be it the stock market, the commodity market or even the cryptocurrency market. The buy and sell difference exists because of the natural flow of the markets and can’t be avoided.
Let’s show you an example from the stock markets. Below is the image of an order book for one of the stocks on NSE (National Stock Exchange), Ashok Leyland:
The first row of the first box is all the bids and asks for that particular stock, arranged from the highest bid price and the lowest ask price.
- The bid column is all the prices at which people are willing to buy the stock; i:e the price that you can sell for.
- The ask column is all the prices at which people are eager to sell for, i:e the price that you can buy for.
If you were to go and buy the stock right now, you would buy it for ₹131.35 at the same if you were to sell it, you will only get ₹131.30, a difference of ₹0.05.
The same happens in cryptocurrency markets too. So there will always be a buy and sell difference for every cryptocurrency, not just on CoinSwitch Kuber but everywhere.
Let’s look at WazirX’s Bitcoin (BTC) order book, for example:
BTC order book, WazirX – 11/6/21, 1:49 PM
If you were to buy Bitcoin on WazirX at this point, you would buy it for ₹28,35,000, whereas if you were to sell it, you could do it at ₹28,33,850, a difference of ₹1,150.
It might strike you that the spread in the stock market is almost negligible, whereas the spread in the cryptocurrency market is quite noticeable. This is so because the stock market is highly matured. Compared to the cryptocurrency market, it has more buyers and sellers. As a result, the bids and asks there are more competitive, thinning the spread.
Whereas in the cryptocurrency market, since it’s a relatively new market with fewer traders, you notice wider spreads.
You will also observe this phenomenon between liquid and illiquid assets. For example, the spread for a liquid asset like Bitcoin, having N number of buyers and sellers, will be slimmer than the spread for an illiquid cryptocurrency.
To Sum Up
The buying price is always slightly higher than the selling price of any asset, no matter what.
It exists because of two reasons:
- Buyers, trying to buy for as low as possible and sellers trying to sell as high as possible.
- Markets arranging all the buy orders from highest to lowest value and organising all the sell orders from lowest to highest value
P.S: KuberVerse is an educational initiative. Anything expressed here directly or indirectly is not investment advice. And we ask you to do your own research before investing.
Disclaimer : Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. The information provided in this post is not to be considered as investment/financial advice from CoinSwitch. Any action taken upon the information shall be at user's own risk.
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