When people enter the market, they do so to either buy or sell an asset. An order book is a record of all the buys and sells in a given time frame.
Both decentralized and centralized crypto exchanges use order books to give traders valuable sentiment of the market. Are there more sellers than buyers or vice-versa? What is the implication of each scenario?
As you can see on the chart below, every crypto exchange will have the basic setup - the asset's price moves over time on the left side and crypto order book on the right side.
If you are entering the market with the intent to buy an asset, you are placing a bid. On the other hand, if you are entering the market with the intent to sell an asset, you are placing an ask. The order book then accumulates the volume of those asks (red) and bids (green). Each trader placed the order at a certain price level - called a limit order - they are most comfortable with.
Because there is a difference in price levels for orders, and their number, order books visualize this volume in the form of buy and sell walls. If a buy (green bid) wall is higher than the sell (red ask) wall, then those fulfilled trades will drive the price upward because there will be a reduction in the supply.
In the same way, a massive sell wall drives the price down because the market is flooded with sell order pressure. However, both sell and buy walls could be either bullish or bearish. Meaning, the crypto market is often at the mercy of crypto whales - large asset holders - who can saturate the order book with either asks or bids, in order to make a profit from a confused market.
For instance, if Mark is placing an ask order to sell a single ETH at €3,000, and Andrew is placing a bid order to buy a single ETH at €2,900, these two orders will remain unfulfilled. They both have to wait for either a seller or a buyer to match their orders. Now, let's say a third trader enters the market - Sophia - trying to sell one ETH at €3,100.
There would be three orders remaining unfulfilled. Then, another trader enters the market - John. He can't wait for the order to be fulfilled, so he places a bid order to buy one ETH at €3,100. However, he doesn't receive the ETH from Sophia, but from Mark. That's because orders are fulfilled in the price sequence.
In other words, orders don't skip past each other. When we multiply that example by thousands and millions of trades, we can see a market depth chart as shown in the image above. At a glance, this chart shows us if the market sentiment is on the side of selling or buying.
Correspondingly, a crypto whale could manipulate the chart by erecting a massive sell wall to place the price below other asks. This would create a cascading market reaction where other traders then change their orders accordingly, driving the price further down. A crypto whale would then buy the dip and accumulate more crypto assets at a low price to sell high later on.