High volatility can cause bidding wars
The cryptocurrency trading market can be as busy as the other financial markets such as stocks, forex, futures, and options. But all have similar actions when it comes to trading and real-time updating of prices upon the opening of markets. The two most important price information update providers are the bid price and the ask price. The bid price is the highest buy order price that is presently available. The ask price is the lowest sell order price available in the market. The price difference between the bid price and the ask price is called ‘spread.’ Another price type worth mentioning is the last price, where it registers the price agreed upon when the last transaction occurred. In simpler terms, it is the act of buying and selling cryptocurrencies through an exchange.
The Bid Price
The bid price is the highest price a potential buyer is willing to pay for a cryptocurrency. Usually, it is the buying price of the exchange. When there is a demand, the bid price increases, meaning the daily trading volume affect the bid price. It is typically preferred that the bid price is the same as the last price or the last successful transaction. Cryptocurrency sales usually occur at a price below the bid price, but never pricier. The bid price is left to the discretion of the buyer but not when it is way out of market standards that it needs a price adjustment.
The Ask Price
The ask price is the lowest price a would-be seller is willing to accept for a cryptocurrency. Typical in most exchanges is their sell price for the lowest ask price presently being offered. It follows that when the demand decreases, the ask price will also decrease. It means that any movement in the daily trading volume will affect the ask price. The watermark applied for a specific ask price depends on the last price of the latest successful transaction. As an ask price is the lowest price offered, it can only be sold at the ask price and above, never below. Sellers have the freedom to name their ask price but if it goes beyond the current market norm, expect no takers.
As the ask price will typically be higher than the bid price, the spread, which is the difference between the two, will be the profit that the exchange will earn for brokering the trades. Though some other factors are considered when computing transaction costs, including asset value and liquidity.
The high volatility of the cryptocurrency market can cause drastic changes upon spreads. That is why sellers opt to enter into compromises with traders and investors to trigger a bidding war. Once it happens, buying pressure can drive the price to increase.