An exchange, like the Luno Exchange, is simply a platform that connects buyers with sellers, much similar to other exchanges/markets, e.g. stocks, commodities, forex, and in our case - cryptocurrency.
Luno does not buy or sell cryptocurrency, nor do we set the rate of exchange. Supply and demand determine this. We’re simply the platform to connect buyers and sellers.
Sell orders and asks
On one side of the Luno Exchange, there’s a seller. The seller has Bitcoin (BTC) and is interested in selling it for local currency - for example, South African Rand (ZAR). The seller goes to the Luno Exchange and makes a BTC deposit.
Let’s say they have 1 BTC they’re interested in selling - they create an order to sell their 1 BTC with the instruction of “I want to get 215,000 ZAR for my 1 BTC”. This is called an ask.
This is known as a maker order - since they’re making an order and adding liquidity to the Luno Exchange (in the form of the BTC which hasn't been traded).
Buyers and bid orders
On the other side of the exchange, you have a buyer. The buyer goes to the Luno Exchange, makes a local currency deposit - the money to be used to buy BTC.
The buyer can now do one of two things:
They can match the existing order (pay the 215,000 ZAR for 1 BTC). This is called a taker order as they’re taking liquidity away from the Luno Exchange.
Or they can create a new order (called a bid) by saying, for instance: “I only want to pay 212,594 ZAR to buy 1 BTC”.
As a new order that does not match with another order, this is also known as a maker order.
So now, we have two orders on the exchange. On the one side, someone is saying that they’ll only sell their 1 BTC for 215,000 ZAR, and on the other side, someone is saying that they will only buy 1 BTC for 212,594 ZAR.
In this scenario, the market hasn’t met, since the buyer and seller don’t agree on the price. The buyer wants to pay too little (in the seller’s view) and the seller is asking too much for their BTC (according to the buyer).
Find out more about how the different types of orders work in our help article here.
More supply and demand
As long as there are supply and demand for the items being bought and sold (BTC and local currency), more buyers and sellers will go to the market and create their own orders, at prices higher or lower than the previous orders.
Eventually, the point will come where the market meets - where there are a buyer and a seller that agrees on a price.
So, let’s say we have another seller with 1 BTC and they say: “I have 1 BTC I want to get 213,000 ZAR for it”. Along comes a buyer that says: “I want 1 BTC and I will pay 213,000 ZAR for it”.
In this scenario, the buyer will get what they want (1 BTC), the seller will get what they want (213,000 ZAR) and that specific order is closed. The market has been met.
The previous orders will still be open until a buyer, willing to spend 212,594 ZAR and a seller, willing to accept 215,000 ZAR for those trades, comes along.
One thing to note is that in order to provide these exchange services, platform integration, customer support, security and make sure that the people trading on the exchange are credible, the platform (in this case the Luno Exchange) will charge a small fee.
Luno follows the popular maker/taker fee model. Our pricing model levies no fees for market makers and a nominal fee for market takers.
Find out more about our maker/taker fees here.