Bid-ask spread vs. Slippage in Crypto Trading

Cryptocurrencies are mainly influenced by the supply and demand on the market. As such, the prices will keep changing based on these factors. As a crypto trader, there are so many other factors that you will need to focus on when trading on an exchange. The order types, liquidity, and the trading volume are some of the crucial factors to bear in mind at all times. Crypto trading has so many elements of speculation and you may not always get the price you want for your trade deals.

Similar to most markets, there is always a push and pull between buyers and sellers and this creates a bid-ask spread. However, depending on the asset you intend to trade, its amount, and volatility you may also get a slippage. These are two possible scenarios in the crypto markets and we want to look at each one of them and the impact they will have on your investment. In the crypto markets, the difference between the highest price bid and lowest price ask is known as the bid-ask spread. The size of the spread will be determined by the trading volume and liquidity of the asset.

When a trader settles for a price that is not the one originally requested, this will create a slippage. This occurs when there are market orders being executed but there is no liquidity. A slippage may also happen where the market is volatile causing the final order price to change. Splitting your orders into smaller parts is one of the best ways to combat and reduces the chances of slippage. Please read on as we dive into more details about these two market events.

Bid-Ask Spread

As mentioned earlier, the difference between the highest bid price and the lowest ask price is known as a bid-ask spread. A limit in the orders from crypto buyers and sellers is what creates this difference and causes the spread. Generally, if you would want to make a quick or immediate sale, it is only logical to accept the highest bid price from the buyer. Conversely, to buy an asset instantly, you would need to accept the lowest price ask from the sellers.

Liquid assets have a smaller bid-ask spread as they have large volumes of orders on the order book. However, some cryptocurrencies may have a wider bid-ask spread due to the high price fluctuations on volume orders. It is important to monitor spread using the bitcoin circuit software.

Slippage

Another common market occurrence is slippage, which is triggered by low liquidity or high volatility. A slippage will happen when a trade will settle for a price that is different from the one initially requested or expected. For instance, if you place an order for crypto at $100 but the market does not have adequate liquidity, slippage will occur. You will be forced to settle for an average price to make your purchase and this will be higher than your $100.

Essentially, once you have placed an order, the exchange will match the sale or purchase automatically. This is meant to limit the orders that are on the order book. By doing so, the exchange will find the best price to fulfill your order. However, if the volume is not sufficient, you will start going higher on the chain and eventually, the order will be fulfilled at a price that is different from your expected or desired.

Final Thoughts

Certainly, when you are trading on crypto markets, slippage and bid-ask spread can happen. This can have an effect on the final price of your trade. While these are occurrences that you cannot entirely avoid, it is best to factor them into your trade decisions.

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