How to Read a Bitcoin Depth Chart
Table of Contents
- A depth chart is useful for understanding the supply and demand for bitcoin at various prices.
- Bitcoin supply is quantified in bitcoin and demand is quantified in dollars.
- Depth charts can be viewed and interacted with on most exchange sites.
Why is Understanding a Depth Chart Important?
The first Bitcoin purchase an individual makes is an exciting, surreal moment. However, that first purchase is followed by the understanding that a decision has to be made: what should an investor do with their bitcoin? Often, individuals will choose to either hold bitcoin as a long-term investment, or engage in trading.
For those looking to engage in trading, knowing how to read a Bitcoin depth chart is an essential part of understanding the market.
The Components of a Depth Chart
In order to read a depth chart, it’s important to understand the components of the chart. While depth charts can vary across exchanges, a typical Bitcoin depth chart depicts a green line sloping negatively from left to right, and a red line sloping negatively from right to left. The green line is known as the bid line, and depicts the bids, or buy orders, at each Bitcoin price point. The red line is known as the ask line, and represents the asks, or sell orders, at each price point. Buy orders are placed in dollars, while sell orders are placed in bitcoin. Finally, the horizontal axis denotes various price points for a bitcoin, and the vertical axis represents the aggregate amount of bitcoin in dollar volume placed.
What is Represented by a Depth Chart
A depth chart is a tool for understanding the supply and demand of Bitcoin at a given moment for a range of prices. It is a visual representation of an order book, which is the outstanding buy or sell orders of an asset at varying price levels. Most Bitcoin exchanges provide depth charts where users can hover over any point on the bid or ask line and see how many buy or sell orders are placed at that price. It is important to remember that each point on the bid line is the cumulative dollar value of all outstanding buy orders at a given price, and the total dollar value of all buy orders is represented on the left vertical axis.
The ask line articulates the same concept for sell orders in terms of bitcoin, which shows up on the right vertical axis. However, the aggregate value of the sell orders is stretched to correspond to the dollar values on the left axis. Because the bid and ask lines represent the cumulative value of all buy orders or sell orders at a given price, depth charts provide insight into the supply and demand of Bitcoin at present, as well as how others may be anticipating prices to fluctuate in the near future.
When reading a depth chart, it’s important to consider the impact of hidden liquidity. The term hidden liquidity refers to pending buy or sell offers that have not been factored into the depth chart. This can impact the accuracy of the depth chart. Another trend to be mindful of when reading a depth chart are buy and sell walls. Buy and sell walls are representative of a significant weight of orders at a given price, and can indicate market trends. The more unrealized sell orders exist at a given price, the higher the sell wall. Similarly, the more unrealized buy orders exist at a given price, the higher the buy wall. Buy and sell walls are a way of measuring future weighted orders and volatility; In this way, the buy and sell walls listed in an order book can give a trader insights into how the other actors in the market are predicting price changes.