Iceberg order: what is it, how does it work and how to use it?

Key Points:

• An iceberg order is a large trade request that is divided into smaller parts for effective passage through the market.

• Without the use of iceberg orders, processing very large orders can cause panic in the financial market and disrupt its balance.

Introduction

Market participants may experience panic for various reasons. In a state of panic, a trader may make an irrational decision that they will later regret. In the worst case, panic triggered by some indicator or activity can throw the entire market into chaos. To prevent such situations, iceberg orders exist. Their use is reminiscent of the expression "tip of the iceberg." Just as a small visible part of an iceberg hides its massive size, iceberg orders conceal the true volume of transactions for the greater good of all market participants. Let's take a closer look at what iceberg orders are and how they function.

What is an iceberg order?

An iceberg order is a series of transactions that a market participant carefully executes according to a well-thought-out strategic plan. Simply put, an iceberg order can be seen as a large trading order broken down into several smaller parts. Executing many small orders is much easier and more profitable than placing one large order.

Example: suppose you need to buy or sell 50,000 bitcoins in one transaction. The total cost of such an operation will be noticeable in the order book, as each transaction is recorded on the blockchain. Moreover, a deal of this magnitude will negatively impact the entire cryptocurrency market. To avoid this and not provoke panic among traders and investors, it is necessary to split the order into smaller parts. This way, other market participants will not pay attention to your actual volume, as it will be processed efficiently.

Why are iceberg orders important?

As any participant in the cryptocurrency market knows, bearish sentiments predominated throughout 2022. This, combined with volatility and unpredictability, made working with cryptocurrencies riskier than ever. Even popular cryptocurrencies that were considered reliable for investment, such as Bitcoin, fell to disappointingly low values.

Crypto whales, holding vast amounts of BTC, are waiting for the market to recover to take action. If such players start buying or selling large volumes of cryptocurrencies, it could seriously destabilize the market. It is known that large holders of cryptocurrencies and other influential parties are capable of manipulating the market.

The "pump and dump" strategy also affects the price of a specific cryptocurrency and, consequently, the entire market. Behind every "pump and dump" scheme is a major player that smaller traders prefer to follow. This is one of the most common methods of market manipulation that can be implemented using iceberg orders.

Iceberg orders mitigate the impact of large trades. They make trading simpler and safer for all market participants. With iceberg orders, it is possible to prevent manipulation and ensure equal rights for both small and large traders. Especially in a volatile market like cryptocurrency, iceberg orders allow for trading in large volumes without harming small traders.

This is exactly the role that iceberg orders play in protecting the financial market from manipulators placing huge trading orders. It is important to note that iceberg orders help to conceal the actual size of the order, thereby maintaining a balance between supply and demand in the cryptocurrency market.

How does an iceberg order work?

Any investor would prefer to avoid placing a large order that could cause panic in the market. Therefore, they readily use iceberg orders, placing many small orders in a specific ratio on the market. This allows them to avoid disrupting market conditions while safely buying and selling large volumes of cryptocurrency.

The principle of iceberg orders can be illustrated with the following example: if someone wants to protect their crypto assets before an unforeseen event, such as a fork or the launch of a mainnet, they may need to sell a significant portion. On the other hand, when bearish sentiment arises, many investors seek to sell their large assets to safeguard themselves.

After selecting a trading platform, the user can proceed to place an order. The exchange automatically interprets it as a request containing small and hidden orders. This type of order is available as an option, after which the large order is converted into smaller parts using an algorithm. As a result, the large order is sold in parts, multiples of 10 or even 5, depending on the amount selected by the person placing the order.

It should be noted that iceberg orders are not available on all exchanges. Platforms that provide direct market access support the placement of iceberg orders.

Conclusion

Understanding the principles of iceberg orders makes it easy to use them to prevent sharp price fluctuations in cryptocurrencies. Previously, these strategies were applied in traditional financial markets, but today, crypto traders use them as a tool to maintain market stability.

Frequently Asked Questions

Why are iceberg orders important? The cryptocurrency market is characterized by high volatility, and asset prices are difficult to predict in advance. In such a situation, iceberg orders help maintain stability, which is why they are so important.

What is another name for iceberg orders? Such orders are processed by market makers or by a party providing liquidity. Therefore, they are also called "hidden orders".