Those speculating on the price of a cryptocurrency can deploy various tools in their arsenal to arrive at an accurate conclusion. Usually, most use a mix of fundamental analysis and technical analysis to place buy and sell bets on crypto. However, a lesser-known but equally vital component that one can use to predict the price of crypto is by looking at the order book. But what is the crypto order book and how does it work? Read on to find out more.

What is an order book?

In simple terms, an order book is an electronic list of buy and sell orders for any asset that is sold on exchanges. The term is applied to crypto, wherein an order book reflects all the real-time buy and sell orders that are entered on exchanges.

The order book is mainly divided into two sections – one that contains buy orders, also known as bid, and the other called sell orders, also known as ask. Each section contains mainly three columns – the price at which crypto was bought or sold, the quantity of crypto bought or sold, and the total column which is calculated by multiplying the price and quantity. Additionally, one may notice green bars along some buy entries and red bars along some sell entries. These bars reflect the volume at a specific price point. Longer the bar, the higher the volume, and vice-versa.

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Additional features, such as rearranging the order book from the highest to lowest orders or changing the lot size can vary from exchange to exchange. For instance, on the crypto exchange ByBit and Binance, one can change the batch on the order book such that the book will reflect orders placed in batches of 100.

A visual representation of the order book is provided on the market depth chart. The chart’s Y axis displays the number of orders placed at each price level, while the X axis displays the prices at which buy and sell orders are made. One can hover over the chart to see how many buy and sell orders are placed at a particular price.

Although each exchange maintains a separate order book that reflects buy and sell orders placed on that particular exchange, websites such as Coinglass offer users a comprehensive list of the average of all orders placed on all available exchanges.

How orders books can be used to predict price changes

So how exactly does an order book help one understand the market and predict the price of crypto? The answer is quite straightforward. Think of the demand book as an accurate measure of demand for a particular crypto in the market. Should the buy orders exceed the sell orders, the price of the crypto would rise. Meanwhile, should sell orders exceed buy orders, the price would fall. But this can sometimes get complicated, so let’s understand it better with an example.

Let’s say there are 100 market participants willing to buy Bitcoin at $20,000 and 100 willing to sell Bitcoin at $20,000. Should all other macro factors remain constant, this is an indication that Bitcoin would most likely remain stable at $20,000, given the equal demand and supply. However, let us now assume that 30 participants drop out at the $20,000 buy range and instead want to purchase Bitcoins at $15,000. Since there are now more sellers than buyers, it’s likely that the price of Bitcoin would fall below the $20,000 mark. However, there is a chance that the price would rebound to $15,000 and move higher since there is more demand than supply at this price point.

Limitations of order books

Order books are more suited to short-term investors who have to keep a close eye on the market at most times during the day. This is because supply and demand can change rapidly in a given day and the data is most relevant for shorter durations.

Furthermore, the order book is not a reflection of the overall health of a crypto project. It doesn’t state why the sell or buy orders are being made, it only gauges market sentiment. Hence, the order book is less suited to long-term investors, liquidity providers, stakers and miners who need more comprehensive data before choosing a project.

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Conclusion

The order book can be a powerful tool in the right hands. It is an important metric to understand the demand and supply of cryptocurrencies. However, since market sentiment can change rather quickly, it’s important to use a combination of different strategies to accurately predict the direction of a cryptocurrency.