Trading cryptocurrencies like Bitcoin and Ethereum has become increasingly popular over the past few years. When trading crypto, you have two main options for placing orders — limit orders and market orders. Both have their advantages and disadvantages, so it’s important to understand how they work before deciding which to use.
What are Limit Orders?
A limit order is an order to buy or sell a cryptocurrency at a specified price or better. For example, you could place a limit order to buy 1 ETH at $1000 or less. The key thing about limit orders is that you specify the maximum price you’re willing to pay (for a buy order) or the minimum price you’re willing to receive (for a sell order).
Some key characteristics of limit orders:
- You set the price — limit orders allow you to control the entry/exit price rather than accepting the current market price. This prevents you from buying at too high a price or selling at too low a price.
- May not execute immediately — a limit order isn’t guaranteed to execute immediately. The order will only fill if the market reaches the price you set.
- Remain open until filled or cancelled — if a limit order doesn’t execute right away, it will stay open until the price is met or you cancel the order. This gives you more control over the timing of the trade.
- They visible to the market — limit orders are visible on the order books of exchanges, meaning other traders can see your order.
When to Use Limit Orders
Limit orders are useful in several situations:
- Buying dips or selling rallies — you can set limit prices below or above the current market price to take advantage of volatility. This allows you to buy low and sell high more precisely.
- Making large transactions — breaking up a large order into smaller limit orders reduces the chance of slippage. You avoid moving the market with a single big market order.
- Providing liquidity — limit orders add liquidity to order books and improve prices for other traders. The orders remain open on the books until filled.
- Risk management — limit orders give you more control over entry/exit prices, allowing better management of downside risk. You won’t buy or sell at unfavorable prices.
- Patient trading — if you aren’t in a rush to enter or exit a position, limit orders allow you time to wait for the price you want. The trade will execute whenever the market meets your requirements.
What are Market Orders?
A market order is the simplest order type — it is an instruction to buy or sell a cryptocurrency immediately at the best available current price. When you place a market order, it will execute as soon as possible at the next available price offered by the market.
Some key characteristics:
- You accept the current market price — you don’t set a specific price and have to take whatever price is available at the time the order executes.
- Executes immediately — market orders fill immediately at the next available price. This speed and certainty of execution come at the cost of control over the price.
- Does not remain open — once a market order executes, the entire order is filled. There are no open orders sitting on the books.
- Not visible to the market — market orders aren’t displayed on order books since they fill immediately.
When to Use Market Orders
Market orders have their uses as well:
- Quickly entering or exiting a position — when you need to execute a trade immediately, a market order allows you to buy or sell straight away at the current price.
- Capturing breaking news/momentum — market orders allow you to jump on opportunities in fast-moving markets. If prices are spiking on some news, a market order secures your entry rapidly.
- Low liquidity environments — in markets with low trading volume, limit orders may take too long to execute or not fill at all. A market order improves the chances of execution.
- Small transactions — the downsides of market orders (slippage, lack of control) are minimized when making small trades. The volatility on a small crypto purchase is less likely to significantly impact your entry/exit price.
Limit orders vs market orders: Key differences
|Factor||Limit Orders||Market Orders|
|Price control||Yes — set your price||No — accept market price|
|Risk management||Better — known entry/exit price||Worse — uncertain fill price|
|Speed of execution||Slower — depends on market reaching your price||Faster — executes immediately|
|Order visibility||Visible on order books||Not displayed|
|Liquidity provision||Adds liquidity to the market||Removes liquidity|
|Certainty of execution||Lower — may not execute if price condition isn’t met||Higher — will execute at next available price|
Limit orders and market orders both have advantages and disadvantages in crypto trading. Limit orders provide control over price but lack speed and certainty. Market orders get you into a position quickly but lack control.
There is no definitively better option — it depends on your trading strategy, style and goals. For example, long-term investors often use limit orders to avoid paying too much for a crypto. Active traders needing to enter/exit positions quickly make more use of market orders.
Consider factors like transaction size, liquidity, volatility, and your risk tolerance when deciding between limit vs market orders. With experience, you’ll gain a feel for when to use each type of order to your benefit in crypto trading.