Buy walls and sell walls can be seen as indicators of the health of a cryptocurrency and general market trend. As such, they can be useful for traders and potential investors.
Before we delve into a more detailed explanation, let’s define what an order book is and why this is important to know in relation to buy and sell walls.
What Is an Order Book?
An order book is a measurement of the limit orders currently placed and waiting to be executed. The order book shows the market depth. It is an indicator of liquidity and of the trading platform’s ability to sustain market orders without the price being impacted.
When buy orders (green) match sell orders (red) on the order book at the same price, a trade is made. If the buy orders and sell orders don’t match, they’ll be placed into the order book until an order is made that does match.
If the quantity of orders is larger on the buy-side than on the sell-side, it indicates that the price is likely to rise. Alternatively, if the quantity of orders is larger on the sell-side than on the buy side, that is an indication that the price is likely to drop.
What Is a Market Depth Chart?
To help you visualize the orders in the order book, you can look at the market depth chart. It can give a clear view of market sentiment. Looking at the market depth chart below, the green area shows the orders looking to buy at a certain price (bids), and the red shows the orders looking to sell at a certain price (asks).
If the green side is higher than the red, this is a favorable sign for the cryptocurrency, indicating its desirability. People are interested in buying it and would rather hold onto what they’ve got than sell.
A buy wall occurs when there are more buy orders than sell orders. The buy wall above is for Bitcoin. It illustrates that more people want to buy than sell. The bigger the buy wall, the more buyers there are. This also indicates the probability of an upcoming spike in prices. Buy walls can be created by multiple orders at the same price or by a whale (an individual or group holding large amounts of a coin) manipulating the price. We’ll delve into that more below.
On the other hand, a sell wall occurs when there are more sell orders than buy orders. This indicates that more people want to sell than buy. The bigger the wall, the more sellers there are. This also indicates a probable drop in the asset’s price will occur. Just as with buy walls, sell walls can be created by multiple orders of the same price or by a whale manipulating the price.
Buy and Sell Walls: Real vs. Artificial
Buy and sell walls can be created artificially to manipulate the price of an asset. A whale may place a large order at a certain price attempting to bring the asset to that price. They can do this because of the large amount of cryptocurrency they possess. A whale has the capability to control the price of an asset. But how do they work this to their advantage?
Let’s take an example: a whale may not want the price of BTC to go above $30,000, so they place a buy order for 1,000 BTC at that price. In response, sellers place orders for 1,000 BTC at $30,000. Because equilibrium has been achieved in the number of buy and sell orders, the price won’t go above $30,000.
Some traders may be influenced by what they see, buying and selling assets accordingly. This fear of missing out is referred to as “FOMO.” But how can you tell the difference between a real wall and an artificial one?
(1) A wall appears significantly and quickly
If a wall appears significantly and quickly, it suggests that there isn’t an accumulation of orders at the same price but rather one big order. Sometimes walls can appear quickly and then disappear as the whale achieves their goal of price manipulation. This is an example of an artificial wall.
(2) An order has been on the order book for a while
Another good way to discern if a wall is real or not is to see if an order has been on an order book for a while. If this is the case, then there’s a good chance that the buyer or seller is genuinely waiting for their order to be executed at that price, and they aren’t trying to manipulate the market.