Most people might be able to tell the difference between buying and selling intuitively. But there are several nuanced differences between buying and selling on a crypto exchange. In fact, a hefty portion of the exchange’s commissions depends on these differences. Read on to find out.
What is buying cryptocurrency?
Buying cryptocurrency at an exchange is the act of exchanging your fiat currency for your choice of crypto coin. For example, if you exchange ₹100 for Bitcoin, you’re buying crypto.
Now you do have a few options when buying crypto. You could, for instance, choose to buy it at the market price and get your order immediately. This way, you don’t have to wait for your crypto but you take the price that the market offers, no questions asked. In this case, you would be the market taker because you “took” the price the market gave you.
But if you have some time on your hands and don’t necessarily want the crypto immediately, you could get a better price by placing an order. This type of order is known as a Limit Order. With a limit order, you put your fiat into the exchange’s order book, and if the price ever reaches your target, your order will go through. When it does, sellers willing to pay the price will take your order forward. In this scenario, you’re the market maker.
Exchanges always prefer more liquidity to less. So they will encourage market makers like you to place more and more limit orders by offering concessions on trading fees. This is why it is cheaper for traders to place limit orders rather than to take the market at its present value.
What is selling cryptocurrency?
When selling cryptocurrency, you want to exchange your crypto for fiat money or any other coin for that matter. In any case, the crypto you’re willing to give away is sold to a buyer willing to meet your price.
Selling crypto also comes with market orders and limit orders.
The difference between buying and selling
The difference between buying and selling essentially centers on whether you can hold an asset in the end. If you get to hold an asset, you’ve made a purchase. Otherwise, it’s a sale.
Buying and selling are usually done to earn profit from the price difference. The price difference between what someone (usually the broker/platform) is willing to sell for and how much they will pay to buy is called the bid-ask spread (or the buy-sell spread). So in the most basic form of trading, the price at which you buy or sell crypto on an exchange always differs from the market price? The difference between the asset’s current market price and the buying price is the spread. The spread allows the exchange to temporarily lock in a price for trade execution while users review the transaction details before submitting their transactions.
The bigger the spread, the more money the exchange makes.
Depending on which coin you’re trading, the spread can also differ. In most cases, coins with lower liquidity have a larger spread and are more expensive to trade. Well-established projects like Bitcoin and Ethereum have relatively smaller spreads than their less established counterparts.
How do people make a profit, then?
If you’re wondering how you’ll ever turn a profit if the selling price is always lower than the buy price, you’re right to do so. There’s no way to make a profit by buying and selling immediately. You only make a profit when the market moves upwards.
In order to sell higher than you bought, the market must raise the price of the coin higher than the price at which you bought it. That’s why you stand to make a lot of money during a bull market and lose during a bear reign. The example below should help you understand this better.
Example
Here’s how it works. If you wanted to purchase 1 BTC and could shell out $20,000, you may place a bid for $20,000. So far so good. However, for you to succeed in buying that BTC, someone else has to agree to sell it for your price. Now someone may think that 1 BTC is worth at least $23,000. Let’s assume that’s the lowest ask on offer.
Now, the spread = Lowest ask – Highest bid = $23,000 – $20,000 = $3,000 (roughly 15%).
That’s the Bitcoin spread in this example. Of course, spreads are hardly ever this large and mostly hover around the 0.5% mark on average, but we hope you get the point.
If you were instead making the purchase directly from an exchange, this would be the spread fee. In that case, the exchange would have made a little less than $3,000 on your trade.
Conclusion
If you’re a beginner trader or someone looking to learn before getting into trading, let us leave you with one piece of advice: Always verify and factor in exchange fees when making trading decisions. With such slim margins in the trading market, every rupee counts. The lower the spread, the better off you are.
FAQs
What is the difference between buying and selling in terms of the exchange rate?
Rates for buying and selling can differ in exchanges due to spread fees. The difference between the lowest ask and the highest bid for a coin at any given point is its spread.
What is buying and selling in exchange?
Using an exchange usually involves exchanging fiat money for a crypto token. When selling crypto, you exchange your token for fiat money or any other coin for that matter. In any case, the currency you’re willing to give away is the currency sold to a buyer willing to meet your price to make the purchase.
Can you make money by buying and selling different cryptos?
Yes, you definitely can, but it’s not as easy as it sounds. We advise that you exercise caution and only invest what you can afford to lose.
How do you make money on a crypto exchange?
Assuming you’re a beginner, the simplest way to do this is to buy low and sell when the price rises.
How do crypto exchanges work?
Crypto exchanges are businesses that provide you with the tools you need to invest and trade in cryptocurrencies on your personal screens. However, they are, in the end, businesses and charge you a fee for providing you with that service in different ways.
