Liquidity efficiency: What is an order book in crypto trading?
Jun 24, 2025・5 min read
On the surface, crypto price charts may seem chaotic. Even experienced technical analysts struggle to pinpoint the exact reasons behind recent price moves or predict future trends. But behind these seemingly random fluctuations is a precise matching engine. Centralized crypto exchanges (CEXs) use order books – digital ledgers that record buy and sell orders – to facilitate trades and organize market activity. Order books also play a key role in reflecting the fair market value of cryptocurrencies at any given moment based on supply and demand.
Given their critical role on CEXs, order books are an essential topic for those interested in the mechanics of crypto trading. Although not every crypto exchange uses an order book, understanding how they work is fundamental to grasping market movements.
In this guide, we'll tell you what you need to know.
What is order book trading? The basics of a crypto order book
One way to think of an order book is as a real-time ledger of buy and sell orders on a crypto exchange. This electronic record tracks active buy (bid) and sell (ask) requests for different crypto assets, continuously updating as new orders enter the market.
But order books aren’t just for recording past trades – they also provide a live view of market demand and supply. When a buyer and seller’s prices align, the exchange executes the trade, and the order book updates accordingly. Order books also reflect when orders are modified, canceled, or left unfilled due to price or liquidity constraints.
What is the importance of an order book when trading?
While order books aren’t the only way to organize trading data, they are the standard tool for tracking buy and sell orders on centralized exchanges. Beyond recording open orders and executed trades, order books provide valuable insights that traders use to navigate the market.
For example, traders can analyze an order book to gauge real-time supply and demand and identify key price levels where significant buying or selling interest exists. This data helps traders determine strategic entry and exit points for swapping digital assets.
Overall, a well-maintained order book enhances market transparency by displaying up-to-date pricing and order activity. By using this matching system, traders can efficiently find counterparties and execute trades in an organized marketplace.
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How does an order book work? How to read order book trading
The information in an order book may seem overwhelming for first-time traders, but the key data lies in a cryptocurrency's bid and ask columns. Bids display active buy orders on an exchange, showing the specific price and quantity that buyers are willing to pay. These bids are typically arranged from the highest to lowest price. On the other hand, the ask column lists the prices and quantities at which sellers are willing to sell their cryptocurrency, usually ordered from lowest to highest price.
When traders place a buy or sell order, they can typically choose from different order types to refine their trading strategy. The two most common are market orders and limit orders. Market orders execute immediately at the best available price, ensuring order completion but exposing traders to potential volatility and price slippage. In contrast, limit orders allow traders to specify the price at which they want to buy or sell. These orders remain in the order book until matched with a corresponding order or canceled by the trader. Limit orders provide greater control over execution but may take longer to fill – or remain unfilled if the market price never reaches the specified level.
As traders continuously place buy and sell orders, the exchange's matching engine scans the order book to pair compatible bids and asks. When a buyer's bid matches a seller's ask, the trade executes, and the exchange updates its records accordingly.
Components of book order trading
Order books are real-time data feeds that continuously update with the latest buy and sell requests. Typically, they are color-coded and include visual tools like heatmaps or depth charts to help traders quickly interpret key market components:
- Buyers' and sellers' sides: The shifting price levels on an order book reflect the latest buy and sell orders on a crypto exchange. Bids (buy orders) are typically shown in green, representing the prices where traders want to purchase an asset. Asks (sell orders) are usually displayed in red, indicating where traders are willing to sell.
- Market price: Positioned between the buy and sell columns, the market price reflects a digital asset's most recent transaction price. This price updates continuously based on supply, demand, and the latest executed trade.
- Spread: The spread is the difference between the highest bid and the lowest ask price. A narrow spread typically indicates high liquidity, meaning trades can be executed with minimal price slippage. A wider spread suggests lower liquidity, which may lead to less favorable trade execution.
- Market depth: This metric provides insight into an exchange’s liquidity by showing the volume of buy and sell orders at different price levels. Greater market depth generally indicates higher liquidity, making it easier to execute large trades without significant price impact. Depth charts also help traders identify key price levels with the most open orders, offering insight into market sentiment.
How to read and analyze an order book
Reading an order book takes some practice, and each exchange arranges this data slightly differently. However, once traders understand what to focus on, an order book becomes a valuable tool for analyzing market trends.
- Identify bid and ask sides: The first step in reviewing an order book is recognizing which columns display buy and sell orders. Typically, the bid column (buy orders) is color-coded green, while the ask column (sell orders) is in red.
- Check price levels and quantities: After distinguishing bids from asks, examine the price levels and order sizes to gauge market sentiment. Comparing these values with the current market price can reveal whether buying or selling pressure is stronger.
- Examine market depth: Market depth provides insight into liquidity at different price levels, helping traders assess how easily large orders can be executed. Depth charts visualize buy and sell interest, but they do not directly measure volatility.
- Evaluate the spread: The bid-ask spread – the difference between the highest bid and lowest ask – helps indicate the liquidity of a trading pair. A narrow spread typically signals a liquid market with low slippage, while a wider spread suggests lower liquidity.
- Cross-reference with other indicators: While order books offer valuable insights, they are limited to a specific exchange and do not capture the entire market. For a broader perspective, traders may analyze market depth on other exchanges, compare order book data across platforms, and use technical indicators to refine their strategy.
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Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.