Two prices, not one
When you look at a coin’s market on an exchange, there are really two live prices. The bid is the highest price any buyer currently offers. The ask (or offer) is the lowest price any seller currently accepts. The difference between them is the bid-ask spread.
Since the bid is below the ask, you cannot buy and sell at the same price at the same moment. If you buy immediately, you typically pay the ask. If you sell immediately, you typically receive the bid. The spread is therefore a cost of trading right away, paid to whoever is on the other side.
Measuring it
A simple illustration, using made-up numbers: suppose the best bid for a coin is 99.90 and the best ask is 100.10.
- The spread is 100.10 - 99.90 = 0.20.
- The midpoint is (99.90 + 100.10) / 2 = 100.00.
- As a percentage of the midpoint, the spread is 0.20 / 100.00 = 0.20%.
If you bought at 100.10 and sold straight away at 99.90, you would lose 0.20 per coin, or 0.2% of the price, even though the market did not move. Fees would come on top of that.
Expressing the spread as a percentage is useful because it lets you compare coins with very different prices. A spread of 0.20 means little by itself; it is large for a coin priced at 1 and tiny for a coin priced at 50,000.
What a spread represents
The people who keep both a bid and an ask resting in the market are often called market makers. They earn the spread when they buy at the bid and sell at the ask, and in return they take on the risk of holding inventory while the price moves. The spread is their compensation for that risk, and for the costs of running their operations.
Competition tends to narrow spreads: if one participant quotes a wide gap, another can quote a tighter one and win the trades. That is why heavily traded pairs on large venues often show very tight spreads, while obscure pairs can show wide ones. The full picture of resting orders behind those two prices is explained in the article on the order book.
Why spreads widen
Spreads are not fixed. Several conditions commonly push them wider.
- Low liquidity. When few participants are quoting, the nearest buyer and seller may be far apart. This is typical for smaller coins, unusual trading pairs and quiet hours. See the article on liquidity and market depth for why thin markets behave this way.
- High volatility. If prices are moving quickly, anyone posting a quote risks being caught on the wrong side of a sudden move. Market makers often respond by widening their quotes, pulling them back, or reducing size. In sharp swings, the gap can grow noticeably even in normally liquid markets, which is one reason price volatility affects the true cost of trading.
- Uncertainty or news. Ahead of or just after major announcements, quoters may step back until the situation is clearer.
- Technical problems. Exchange outages, delayed data feeds or disrupted connections can make quoters withdraw, leaving a thin and wide book.
- Cascading liquidations. When forced closings of leveraged positions hit the market, a flood of one-sided orders can consume the available quotes and leave a gap behind. This is discussed in the article on a liquidation cascade.
- Fragmented attention. Weekends, holidays or off-peak hours may bring fewer active quoters in some pairs, though crypto markets operate continuously.
Why it matters to you
The spread affects different people differently.
- Market orders cross the spread by design. Buying at market means paying at least the ask, and possibly more if your size exceeds what is offered there. The article on market orders and limit orders explains how this plays out, and slippage covers the extra cost of bigger sizes.
- Limit orders can sit inside or at the edge of the spread and wait for someone to trade against them. You may save the cost of crossing, but there is no guarantee your order will fill.
- Frequent trading multiplies the cost, because each round trip pays the spread again.
- Stop-loss and similar orders can trigger at unfavourable prices when the spread widens suddenly.
Common misunderstandings
- A narrow spread does not mean a safe market. It tells you the cost of a small immediate trade at that instant. It does not say anything about whether the price will rise or fall.
- The last traded price is not what you will pay. Depending on the side you trade, you generally deal near the bid or the ask. Charts that show only the last price hide the spread entirely.
- Spreads differ between venues. Because each exchange has its own set of quoters, the same coin can show different spreads on different platforms.
- Displayed spreads can be misleading in very thin books. A tiny quoted size at the best prices may be gone by the time your larger order arrives.
A practical way to think about it
Before trading, it can help to look at the bid, the ask and the size available at each. A wide spread, or a small quantity at the best price, are signals that the cost of trading right now may be higher than usual. Waiting, using a limit order, or reducing size are ways people try to manage that cost, though none of these guarantees a better outcome.
Cryptocurrency prices are volatile and you can lose some or all of what you put in. This article is a general explanation and is not financial, tax or legal advice.