Market Depth: How to Check Metric Measuring Cryptos’ Ability to Sustain Large Orders Without Impacting Price

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Last updated Mar 20, 2024 | 10:44 AM UTC

A depth chart is a visual representation of supply and demand levels for a particular asset or cryptocurrency such as Bitcoin (BTC). 

How do depth charts help?

  • Insights: With a better view into market dynamics, depth charts can help investors assess the liquidity of a particular crypto, and assess its buying or selling pressure at different prices. They also identify support and resistance levels, which are key entry/exit points for traders.
  • Market sentiment: By observing market depth, investors can gauge sentiment by observing patterns such as bid-ask spreads, as well as order imbalances. This information and assessment of market trends can help investors make better strategic choices. 

Before you study depth charts

  • Fundamentals: Before jumping into the deep end, make sure you have a good understanding of Bitcoin and cryptocurrency markets. Learn about the history and the factors that can influence price movement.
  • Technical analysis: Familiarize yourself with historical price and volume data to understand patterns and trends that may suggest price movement. Additionally, be sure to grasp the basics.

How to check market depth

  1. Open or log in to your desired crypto trading platform and navigate to the 'Order Book' section. This is where you can view market depth.
  2. Locate the depth chart, which is divided into two sides, bids (buy orders) and asks (sell orders).
  3. Analyze the bids and asks. Here you’ll see orders, their prices, and volumes. Their cumulative depth represents the total number of bids/asks at each price level.
  4. Interpret the depth chart. Deeper market depths can be indicative of higher liquidity and potentially smaller price movements. Areas where buy and sell orders are concentrated can represent support and resistance levels.

Key terminology

  • Bid and ask: Bid refers to the highest price a trader is willing to pay for an asset. Ask refers to the lowest price a trader is willing to sell the asset. These prices are found in the order book and are a decent representation of market sentiment.
  • Order book: This is a complete record of all buy and sell orders for any given asset, typically displayed on a trading platform. It shows the quantities of an asset that traders are buying and selling.
  • Spread: In trading, spread refers to the difference or transaction cost between the highest bid and the lowest ask price. Narrow spreads can mean more liquidity with slimmer bid-ask spreads. Wide spreads indicate lower liquidity and possibly higher transaction fees.
  • Liquidity: This indicates how easy it is to buy or sell an asset without causing large fluctuations in price. With Bitcoin for example, liquidity is determined by the volume of buy and sell orders at various prices, and the depth of the order book. High liquidity means large order volumes, making it easy to buy and sell positions without impacting prices. 
  • Resistance levels: These are price levels where selling pressure is anticipated to be stronger than buying, which can potentially halt the upward movement of an asset or cause it to trend downward. These levels are usually defined by previous peaks or price ranges where an asset has historically struggled to maintain or break past. If an asset breaks above resistance, it could indicate further price appreciation.
  • Support levels: This is when buying pressure outweighs selling at certain prices. These levels are determined by previous lows or past historical points where the price has found support. If the price falls below the support level, this could indicate a bearish sentiment and a further decline in price.

Key indicators on a depth chart

  • Order book depth: The order book will help traders understand the current state of supply and demand at certain prices. This helps to identify potential support and resistance levels.
  • Volume profile: This shows the trading volumes at particular price levels. Traders can use this to find areas of high trading activity as well as possible support/resistance areas.
  • Bid-ask spread: The difference in the highest buy offer (bid) and the lowest sell offer (ask) are a good indicator of market liquidity and possible price volatility.
  • Market depth ratio: This indicator compares the volume of buy orders to sell orders at different price levels. Traders can use this to find areas of potential price reversals or imbalances.

Written by

Eddie is a seasoned crypto writer and Bitcoin maximalist.