Market basics

What a price actually is: the order book, the spread, and the last trade

A price on a screen looks like a fact about a coin. It is not. It is the most recent agreement between two people who each wanted something slightly different, and the next one has not been negotiated yet.

About 10 minutes to read. Free, no account.

There is no "the price". There are two prices

Every exchange keeps a list of unfilled orders for each market, called the order book. One side holds offers to buy - the bids. The other holds offers to sell - the asks, sometimes called offers. Each line says a price and a quantity, and that is the entire machine.

The top of each side is what matters most. The highest price anyone is currently willing to pay is the best bid. The lowest price anyone is currently willing to accept is the best ask. The ask is always higher than the bid, because the moment they meet, a trade happens and both lines are consumed.

The top of a book

asks (sellers)    100.00   for 2 coins      <- best ask
bids (buyers)      99.80   for 4 coins      <- best bid

spread            100.00 - 99.80   =  0.20
mid price        (100.00 + 99.80) / 2  =  99.90
spread as %       0.20 / 99.90    =  0.20%   (to two places)

So what is the price of this coin? If you want to buy right now you pay 100.00. If you want to sell right now you get 99.80. The 99.90 in the middle is an average of two numbers and nobody can trade at it - it is a convenience for charting, not a price you can get.

The last trade is a fact about the past

The big number at the top of an exchange page, the one a chart is drawn from, is usually the last traded price. It is the price at which the most recent trade actually printed. That makes it a historical record and not an offer: nobody is obliged to trade with you there, and the orders that produced it are gone.

This matters more than it sounds. A chart made of last-trade prices can show a level that was touched once, by one trade, for a tiny quantity, while the book around it was nearly empty. The line on the chart looks identical to a level where millions changed hands.

Crossing the spread is a real cost

Take the book above and do nothing clever: buy one coin immediately, then change your mind one second later and sell it immediately. The market has not moved at all.

A round trip with no price movement

buy  at the ask    100.00
sell at the bid     99.80
result             -0.20  per coin

as a percent       0.20 / 100.00  =  0.20%

exchange fees are not even in this yet

You are down 0.20% before a single thing happened in the market. That is what the spread is: the price of wanting to trade right now. It is charged by whoever was patient enough to leave an order resting, to whoever was impatient enough to take it.

A trade therefore does not start at break-even. It starts behind by the spread, plus fees - which get their own lesson, because the arithmetic surprises people. See fees and what they really cost.

A price only applies to a quantity

The best ask in that book was good for 2 coins. If you want 10, the first 2 cost 100.00 and the rest come from whatever is above. Here is the rest of the ask side:

Buying 10 coins when only 2 are at the top

level 1     2 coins at 100.00   =    200.00
level 2     3 coins at 100.10   =    300.30
level 3     5 coins at 100.40   =    502.00
                                   --------
total      10 coins                  1002.30

average price   1002.30 / 10   =  100.23
versus the quoted ask            100.00
the difference  0.23 / 100.00  =  0.23%

You saw 100.00 on the screen and paid 100.23 on average. Nothing went wrong; the screen was telling you the price of 2 coins and you bought 10. That gap is called slippage, and it is a property of the book, not of your luck.

This is also why the same order is cheap on one coin and expensive on another, which is the subject of liquidity and depth.

Why two exchanges show different prices

Each exchange has its own order book, with its own participants. There is no central price for a crypto asset the way there is a closing auction on a stock exchange. So two venues trading the same coin print different last trades, hold different spreads, and move at slightly different moments.

Arbitrage keeps the big venues close together, because a wide enough gap is free money for whoever can move between them - but closing it costs fees and transfer time, so the gap closes to roughly those costs, not to zero.
Smaller venues drift further and recover slower. A thin market can print a price nobody else in the world agrees with, and it stays on the chart forever.
An index price or mark price is a blend of several venues, used by derivatives exchanges precisely so that one venue cannot decide what your position is worth. It is a computed number, not a trade.
A "price" quoted without a venue is therefore incomplete. If a level matters to you, it matters on the book you are going to trade on.

What a price cannot tell you

It cannot tell you size. 100.00 says nothing about whether one coin or ten thousand traded there.
It cannot tell you intent. A resting order can be cancelled a millisecond before you reach it, and most resting orders are. The book is a snapshot of intentions, and intentions are free to change.
It cannot tell you what you will get. A quote is good for the quantity shown, at the moment shown. Between your click and the exchange matching your order, both can change.
It cannot tell you why. The same print can come from one forced seller or from a thousand willing ones, and the chart records them identically.

None of this makes prices useless. It makes them measurements with error bars rather than facts, and almost every expensive surprise in trading comes from having treated one as a fact.

The terms, defined

Order book: The exchange’s list of unfilled buy and sell orders for one market, each with a price and a quantity.
Bid / ask: The best price currently available to sell into (bid) and to buy from (ask). The ask is always the higher of the two.
Spread: Ask minus bid. The cost of trading immediately rather than waiting, paid by the impatient side to the patient one.
Mid price: The average of the bid and the ask. Useful for measuring, and not tradeable by anybody.
Last traded price: The price of the most recent completed trade. A historical record, which is what most charts are drawn from.
Slippage: The gap between the price you saw and the average price you got, caused by your order consuming more than one level of the book.
Mark / index price: A price computed from several venues, used by derivatives exchanges to value positions so that one venue’s print cannot move everybody’s margin.

What this means in practice

Before you look at a chart, look at the book: the spread, and how much size is sitting at the top of it. The chart does not show you either.
Read the spread as a percent, not in points. Twenty cents is trivial on a 100 coin and enormous on a 2 coin.
When somebody quotes a price, ask whether they mean the bid, the ask, or the last trade. Those are three different numbers.
Assume your market order pays worse than the quote, and check how much worse by reading the levels above the top of the book.
Compare the price on the venue you actually trade on, not on whichever one agrees with you.

Nothing in this lesson is financial advice or an instruction to trade. See the risk disclaimer. We never recommend a leverage setting - that decision is yours.