Market mechanics – Part 1, Introduction

Ever wonder how buyers and sellers get matched up by a cryptocurrency exchange? What does the current price of Bitcoin really mean, and why does it sometimes vary between exchanges? How come you sometimes don’t get the current price when you buy or sell large amounts of cryptocurrency? What’s liquidity, and why do some smaller ICOs have really big jumps in price, seemingly at random?

This blog series is a primer for many of the basic concepts of how a market actually functions, on a technical level. If you have a financial background, most of this should be common knowledge. However, a number of people new to crypto don’t start with any more knowledge than “Bitcoin has a price, and it sometimes goes up and sometimes goes down”. If this describes you, and if you’re curious about why the price goes up and goes down, you should read this.

Table of Contents

  1. Introduction
  2. Functions of an exchange
    1. Custody
    2. Settlement
    3. Tax reporting
    4. Matching
    5. Market data
  3. Types of exchanges
    1. Order book
    2. Over-the-counter (OTC)
    3. Derivatives
  4. How order books work
    1. Mechanics
    2. Types of orders
      1. Market
      2. Limit
      3. Stop
    3. Matching
  5. What’s in a price?
  6. Market pitfalls
    1. Slippage
    2. Market cap
    3. Hidden supply
    4. Flash crash

Almost all of the information in this article also applies to other markets like the stock market, commodities markets, foreign exchange markets, and other securities markets. So even if you don’t have a lot of your wealth invested in crypto, this is useful background knowledge for any sort of financial transaction.

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