Market Mechanics – Part 5, What’s in a Price?

Part of a 6-part series on market mechanics:

  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

Price is the one number that traders care about the most, and the one that makes the most headlines. “Bitcoin tests $10K limit.” “Will we see sub-$8000 Bitcoin?” “Bitcoin trading sideways in a narrow range between $8400-8600?” But what does that mean? As we’ve seen above, crypto markets have thousands of participants all independently transacting.

The price listed on an exchange at any given moment is almost always the price of the last trade. It can move quickly as new orders come in: on May 16 2019, a sell order for 5000 BTC on Bitstamp crashed the price from $7600 to $6190 in under 10 minutes.

The Bitstamp flash crash on a chart

The price shown on charts on a given exchange can mean several different things:

  • The open price is the price of the first trade within a time period.
  • The high price is the maximum price within that time period.
  • The low price is the minimum price within that time period.
  • The close price is the price of the last trade within the time period, or the last trade if the time period is still going on.
  • The volume-weighted average price (VWAP) is a weighted average of the price of all trades within the time period, with the weights being the quantity traded.
  • A simple moving average (SMA) is an average of the last N time periods (N is often 15/30/100/200 days), with the price usually being the closing price in each time period. This smoothes out random fluctuations in the price.
  • An exponential moving average (EMA) is also an average of the last N time periods, but with more recent time periods being weighted more heavily. This smoothes out random fluctuations while also being able to capture recent changes in the trend.

The price of the Bitcoin market as a whole – including multiple different exchanges – is even more complicated, because each exchange has a different order book and hence a different price. Different market-data services compute this in different ways:

  • The price may be the price of the last trade across all exchanges. Cryptolazza uses this for the price line on the depth chart.
  • The price may be a simple average of the prices on each exchange, with each exchange being weighted the same. CoinMarketCap and CoinGecko do this.
  • The price may be a volume weighted average of the prices of each exchange, with each exchange being weighted by the amount that was transacted on it. OpenMarketCap does this, and Cryptolazza uses it for the table of prices.
  • Many cryptocurrencies are traded for stablecoins like Tether rather than actual fiat money. A stablecoin is assumed to be worth $1, but in practice several stablecoins (particularly Tether) have broken the buck on numerous occasions. Some market data services always assume that a stablecoin is the same a dollar, while others attempt to convert prices by dividing by the actual market price of the stablecoin.
  • The market data service may filter out exchanges that are known to allow market manipulation. OpenMarketCap and Cryptolazza do this.
  • The market data service may or may not include foreign exchanges like Bithumb and Coinone (Korea), Golix (Zimbabwe), or SurBitcoin (Venezuela). These often have prices that wildly diverge from US dollars, Euros, or Yen, because of exchange rates and capital controls.
  • Different market data services have different update times, ranging from one second (Cryptolazza and Messari) to one minute (OpenMarketCap) to 5 minutes (CoinMarketCap)

This is why reported “Bitcoin prices” differ. In most cases they should be within 1%, but no two sources will have the same price.


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s