How to trade: Fees and Order Types

It’s important to emphasize that investment in cryptocurrency involves significant risks and it is possible that you may lose a substantial proportion or all of its investment in cryptocurrency. Before you invest, we suggest you read more about the risks here.

These series of posts help you get familiar with Bitso Alpha and teach you how to trade. If you want to start trading cryptocurrencies, but don’t know where to start, these posts are for you.

This is the third blog from the “How to trade” series. In our previous post, we learned about Order Books and Market Orders in Bitso Alpha trading platform. This time, we’ll talk about Fees and Order Types available on Bitso.

By now, you are familiar with the different markets available, their respective order books, and how to buy and sell cryptocurrencies on Bitso Alpha using market orders. First, let’s get into how trading fees on Bitso work.

Fees model in Bitso: Maker and Taker fees

Bitso’s fee page maps out the details and percentages for every market here, so check it out when you have a moment. The fee percentage depends on the volume a user has traded in the last 30 days. The more you trade, the fewer fees you pay. For our purpose, we will use the base percentages: Maker Fee of 0.5% and Taker Fee of 0.65% for the MXN/BTC market

The term “Maker” refers to traders that provide liquidity to either the buying or selling orders of the book. They “make” the market by adding orders and committing funds. “Takers” are on the opposite side: they “take” liquidity from the books by filling existing orders.

For our example, let’s review a 0.5 BTC market order that’s filled by 3 orders on the selling side, shown below:

In our scenario, the 0.5 BTC market purchase order is the “taker,” whereas the 3 selling orders that fill it are considered the “maker” orders. For every trade, there is always a Maker and a Taker. A way we like to think about takers is: if your order is completed by a previously existing order, you are the “Taker”.

Back to our example, the buying market order pays a 0.65% fee, as it is “taking” liquidity off of the market. These fees are subtracted automatically from the 0.5 BTC market order. After the fees are deducted, we end up with 0.49675 BTC in our wallet. In this case, the sell orders will pay 0.5% on their end, which is subtracted in MXN.

Limit Orders

Market orders are a great way to trade immediately, they provide instant liquidity. While you give up control over the price and buy at market price, the order gets filled immediately. However, if you want to have more control over the price of your orders, you can use Limit Orders.

We will use the following snapshot of an Order Book for BTC/MXN market for the examples:

With a limit order, you enter the amount you want to buy as well as the price you are willing to pay.

In our original order book our example has the best bid currently, offering a buy order at 199,500.00 MXN, and the best ask price at 200,500.00 MXN. We can set any price we want, but for our example, let’s set our imaginary limit order at a price of 200,000.00 MXN. This way, we’ll be bidding in exactly the middle of the spread.

This is what the limit order generation looks like in Bitso Alpha:

When our buy limit order is created, there are no sell orders at 200,000.00 yet, so the new limit order will be added to the top of the bids:

By creating this order, we have increased the purchase price of BTC from 199,500.00 MXN to 200,000.00 MXN. This order has added liquidity to the buys’ order book.

This is where your pending Limit Orders are displayed in Bitso Alpha:

Four things can happen from here:

First: Since the order is at the top, it can be filled either fully or partially by the next sell orders that are added to the order book.

Second: It can be pushed down in the order book if someone else creates a new limit order at a higher price, say 200,000.01 MXN. Even by 1 cent, the new order has a better price and is placed at the top.

Third: Let’s say that the price of BTC suddenly goes up to 220,000.00 MXN before our order is filled. This will not affect your limit order. If the price returns to 200,000.00 MXN and it has not been canceled, it can still be filled.

Fourth: It can be canceled by the owner. By default, limit orders don’t expire. This is called “Good until canceled.” It’s an option when an order is created. The owner must specifically cancel it or it will remain in the order book until it gets filled by another trader when the price of BTC matches the order.

When you create a limit order that amount is committed in the order–the amount is subtracted from the available balance in your wallet. It can be canceled at any time by clicking the close button. This will make your balance available again.

Generally, limit orders fall under the maker category since these orders typically provide liquidity to the order book. These orders will pay the lowest maker fees.

Market and limit orders are the most basic types of trades that people make, but Bitso offers two other types of conditional orders.

Stop-Loss Orders

A stop-loss order is basically a conditional market order. This is how it is created:

Let’s say BTC is currently trading at 200,000.00 MXN. However, you expect some volatility soon and believe there is a possibility that the price of BTC will fall. To protect your position, you decide to place a stop-loss order at 195,000.00 MXN in case the price of BTC starts trading downwards.

If the price of BTC reaches 195,000.00 MXN, Bitso submits a market order on your behalf and the order is traded like a regular market order.

This might not happen, however if it does, you’ve protected yourself against any major losses. Unless you’re a HODLer then keep holding, my friend.

Stop-Limit Orders

Similar to stop-loss orders, stop-limit orders are conditional limit orders that are generated once the price reaches a defined stop price. This is how they are entered:

In this scenario, once the price of BTC reaches 195,000.00 MXN, a limit order will be set at a price of 194,500.00 MXN. Then it will behave as any regular limit order. Stop-limit orders are useful if you want to have better control over the price at which you sell.

In the case of reaching the stop price, you have to keep in mind that if the market drops quickly, your limit order may not be filled at all. It is used primarily as a risk management tool in combination with technical analysis, a topic that we’ll discuss in the future.

This covers the basic concepts of orders, now you are ready to start applying this to your trades. In our next post, we’ll cover graphs and candles and how to use them to make price predictions. Don’t miss it!

Special thanks to Bitso user Luis Andrés Hernández González for your valuable contribution to this post.