Market Order vs. Limit Order: Which One to Use and When?

When buying or selling cryptocurrency, there are two main ways to determine which price the trade will execute: market order and limit order. These two types may determine your success in acquiring an asset at different price levels. Crypto traders will see these on all crypto exchanges. Therefore, it’s good to get familiar with these two terms and know when is the right time to use them.

What is a market order?

The first step of trading cryptocurrency is placing an order. An order is a command to buy or sell cryptocurrency. A market order is the simplest way to make an order. Either buying or selling an asset, this type of command executes immediately. The transaction of the cryptocurrency follows the most recent market price. This means that the trader agrees to buy or sell an asset at the best available price.

Market order example

Let’s say you want to buy a cryptocurrency. The current Litecoin (LTC) price is $90. To place a market order, you just have to enter the amount of cryptocurrency you wish to buy. For example, 5 LTC.

Since 5 x 90 = $50, this means you simply pay $450 and the trade executes instantly at the market price.

Another example in practice is when you want to sell an asset. You decide to sell 5 LTC at the current price of $90. You only have to enter the order and it will sell at the current market price. Therefore, you agree to accept what the market price is right now.

When you place an order to buy a crypto asset, the displayed price may be different than when purchased. This is called slippage. This is because there is a slight time difference during the process. Between the time the broker receives an order, the market price may experience fluctuation. Trading with market orders means the trader never has complete control over the price due to slippage. However, the differences can often be so small, it is not an issue for many traders.

When to use a market order

• When you want to be sure that the order is through.
• When trading a stable asset.
• When trading in small amounts.

What is a limit order?

A limit order allows traders to enter a specific price. This gives traders control over buying or selling prices of their assets. By using a limit order, traders can manage the risk of price fluctuation. Another advantage of this order type is traders do not have to watch the market at all times. When the market price meets the trader’s criteria, the deal automatically executes at the set price.

Furthermore, the order can be set for a limited period. There are time-limit options and they may differ across platforms. You can keep the order for the current day or keep it open for longer (e.g. 60 days). However, limit orders can be disadvantageous. There is a chance that the market price will never meet the trader’s specified price during the predetermined time - leaving the deal to expire.

Limit order example

For example, let’s say the current price of 1 LTC is $90. You predict that the price of a cryptocurrency will fall and prefer to buy it at a lower price (e.g. $85). So, you can place a limit order of 5 LTC for $85 each. But the order does not fill right away. It will fill when the price drops to $85.

Yet, there is no guarantee that the price will meet the specified price. When this happens, the order may never go through.

It also applies to selling a crypto asset. Another example is when you set a sell limit order at $100. You only need to enter the order and wait until the market price goes up to $100. When the market price reaches $100, it will trigger the order to go through. Again, there is no guarantee that the market price will reach the specified price.  

When to use a limit order

• When you want to buy or sell an asset at a specific price.
• When you want to plan your trade without constantly monitoring the market.
• When you want to execute multiple trades at the same time without manual action.

Market order vs. limit order: which is better?

The use of market orders and limit order depends on each trader's situation. Both may result in an acquisition of an asset. But the success of the transaction is different between the two. Traders may also obtain assets at different prices.

A market order is the easiest and quickest to use. It is more suitable for traders who are not bothered by little fluctuations. But when trading a volatile asset and in large volume, it is safer to use a limit order.

This is because limit order allows traders to set a certain price. It can prevent transactions that do not meet traders’ expectations. Both methods have their advantages and drawbacks. Traders have to assess and consider factors that may influence the decision.

Market order and limit order in crypto

Both the crypto market and stock market use market orders and limit orders when placing an order. It works similarly. But the main difference is the liquidity of the asset. The stock market is more liquid compared to the crypto market. Thus, the stock market has a higher chance of the order going through. In highly liquid cryptocurrencies, the price may experience higher fluctuation. This may result in a different price when purchased than the initial market price. In addition, when the market price darts away from the trader’s prediction, the order will fail.    

Bottom Line

In conclusion, market order and limit order both have their advantages and disadvantages. You will have to assess the situation to see which method suits best for the transaction. Use a market order when you want to be sure that the order is a success. If there is a higher risk of volatility in the market price, use a limit order to minimise the risk.