Understanding Basic Order Types

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Basic Order Types: Limit, Market, and Index

Cryptocurrency exchanges often host three basic order types that customers can use: limit orders, market orders, and index orders. These terms may sound daunting at first, but newcomers needn’t be concerned as they can be understood easily once explained.

Limit Orders

A limit order is a type of order a trader can place if he or she desires to make a trade at a specific, predetermined price level. Essentially, you place a limit order to let the price come to you. For example, say you want to buy 1 Bitcoin (BTC) for $10,000, but the price is currently at $11,000. In this case, you can place a limit order for 1 BTC at $10,000. If Bitcoin’s price on the BTSE exchange drops down to $10,000 or lower after you place your order, the order fills and you will be in a 1 BTC long position. This is true for both spot and futures trading on BTSE.

One BTCPFC (Bitcoin Perpetual Futures Contract) is valued at 1/1,000 of 1 BTC, so inputting 1,000 contracts for a limit order of 1 BTC equivalent has a notional value of $10,000 (assuming BTC’s price is at $10,000, the price used in the example). One ETHPFC is worth 1/100 of 1 ETH, 1 LTCPFC is worth 1/100 of 1 LTC, and 1 USDTPFC is worth $10 USD. These contract values are the same for BTSE’s monthly and quarterly futures contracts.

Market Orders

A market order fills immediately at whatever prices are available in the order book at the time of execution. Market orders are common if traders want to catch a breakout in price and do not want to wait for the price to come back down to pick up their limit orders.

A trader seeking to capitalize on the breakout of a chart pattern might look to use a market order upon the break of such a pattern. If Bitcoin’s price is at $10,000 inside of any given pattern and breaks out to the upside, breaking the pattern at $10,100, a trader may want to execute a market order to get into the action and catch the price move immediately, at whatever price is available in the order book.

The catch, however, is that your fill price (the price you actually get into a trade at) will depend on the liquidity available at the time of your market buy/sell execution. If Bitcoin’s price is at $10,100 and you want to get into a 20 BTC long position, there may not be enough sellers available at that price. The market order then picks up all the sell orders closest to your desired market price. This may result in filling some of your buy orders at prices notably above $10,100, depending on the amount of BTC in the order book at the time of execution.

Index Orders

A user specifies an index order to buy or sell at a specific deviation from the index price. For example, if the bitcoin index is trading at $10,000, the user can place an index order with deviation of -5%. This means the index order always stays 5% below where the market is trading, even as Bitcoin prices fluctuate.

BTSE has three single coin indexes: the BTC index, the ETH index, and the LTC index.

The BTC index takes the composite price of spot BTC from the order books of several different exchanges and combines those prices into a single price based on weighted averaging, giving a sense of Bitcoin’s price across multiple exchanges. BTSE’s BTC index price is based 50% on spot BTC prices from Coinbase Pro and 50% on spot BTC prices from Bitstamp. LTC and ETH indexes are weighted 33.3% from Coinbase Pro, 33.3% from Bitstamp, and 33.3% from OKEx.

Exchanges can trade Bitcoin at slightly different prices depending on their liquidities and locations. BTSE’s BTC index might be useful if customers want to trade based on the fair market value of Bitcoin, derived from the order books of numerous exchanges. The same concepts are true for BTSE’s LTC and ETH indexes.

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