Whether you are a crypto newbie or an experienced veteran, most of us will use a crypto exchange at some point. When using a crypto exchange, you can use different types of cryptocurrency "orders" that can directly impact the price that you pay or the amount that you receive for selling your crypto. In this article, I'll cover the basics of a market order, limit order, and a stop order and explain some of the advantages and disadvantages of each type of order.
Market Orders
A market order is the most basic, straightforward type of cryptocurrency order that you can place. A market order essentially means that you are agreeing to buy or sell a specified amount of cryptocurrency at the market price. At the time of writing, the price of one Bitcoin is approximately $19,228. So if I were to place a market order, my order would be filled more or less instantaneously at that price. Herein lies both the advantage and disadvantage of a market order. On the plus side, a market order is incredibly simple and allows your trade to be processed very quickly because you are taking whatever the market is offering. The disadvantage is that you are taking whatever price the market offers.
Limit Orders
A limit order gives more control over the actual price that you receive or pay for your cryptocurrency. To continue with the same example, instead of placing a market order for one Bitcoin, I could place a limit order in which I specify that I will only buy Bitcoin when the price falls below $19,000. When using a limit order, I have the advantage of specifying the exact price that I want to pay. However, I have no guarantee that the price will actually reach that amount. Suppose that I believe that BTC is going to below $19,000 soon and I want to automatically buy at that price without having to stare at CoinGeko. I could place a limit order to buy one Bitcoin at $19,000 and my trade would be automatically executed. However, there is also the possibility that the price continues to rise for several months or even years and that my order is never filled.
A limit order can also be used to sell cryptocurrency. For example, I could place a limit order to only sell Bitcoin when the price rises above $21,000 per Bitcoin. As with the sell limit order, this is great for automatically executing a trade, but it is also possible that the price reaches $20,999 and then crashes without my order being executed. Another disadvantage of the limit order is that it may be only partially filled. Let's suppose that I'm trying to sell 10 Bitcoin and the price briefly jumps above $21,000. I would begin selling Bitcoin at $21,000, but if the price fell below $21,000 before I was able to sell all of my Bitcoin I would have only been able to sell a portion of the total amount that I wanted to sell.
Stop Order
The third basic type of cryptocurrency border is a stop order. A stop order can be thought of as a combination of a limit order and a market order in that it triggers a market sell or buy order once a specific price is reached. For example, suppose I have a stop order to sell Bitcoin at $10,000 per Bitcoin. Once this price is reached, I will begin selling Bitcoin at the market price even if the market price dips back below $10,000. This differs from the limit order in that the limit order would wait to sell until Bitcoin reaches $10,000 and would pause itself once Bitcoin falls back below $10,000. By contrast, once a stop order is triggered, it buys/sells the desired quantity at the best price until the order is complete.
Summary
In summary, different types of orders can be used for different situations and it's important to have a basic understanding of how all three types of orders work. A market order offers the most convenient and quickest execution but may not always give the best price. A limit order ensures that you don’t sell below a certain point or that you don't pay more than a specified price, but there is always the possibility that your order won't be filled at all if that market price is not reached. Stop orders can be thought of as a combination of a market order and a limit order in the fact that it will buy/sell the entire quantity (at a market price) once a specific price threshold is reached. Obviously not financial advice.
Thanks for reading!
References
https://www.coingecko.com/en/coins/bitcoin
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