What Is Bid-Ask Spread and Slippage? 

When trading cryptocurrencies, understanding bid-ask spreads and slippage is essential for optimizing strategies and maximizing profits. These hidden costs can make up anywhere from 0.01% to over 10% of a trade, depending on the market and asset. By learning how they work and how to minimize them, you can protect your capital and improve execution.

What Is a Bid-Ask Spread?

The bid-ask spread is the difference between the highest price a buyer will pay (bid) and the lowest price a seller will accept (ask). This gap reflects market liquidity and trading activity.

• Tight spreads = high liquidity, lower costs

• Wide spreads = low liquidity, higher costs

How to Calculate Bid-Ask Spread?

Calculating the spread is straightforward:

Spread = Lowest Ask Price - Highest Bid Price

For example, if the lowest ask price for Bitcoin is $30,050 and the highest bid price is $30,000, the spread is $50.

You can also express the spread as a percentage of the ask price:

Bid-Ask Spread Percentage = (Spread / Lowest Ask Price) * 100

In the above example, the bid-ask spread in percentage terms would be 0.17%.

Why Spreads Matter?

The bid-ask spread plays a crucial role in trading, serving as a hidden transaction cost and a marker of market liquidity. Narrow spreads usually indicate a liquid market with active trading, while wider spreads suggest lower liquidity and higher trading costs:

• Transaction Costs: Every time you execute a trade, you buy at the ask price (the lowest price a seller is willing to accept) and sell at the bid price (the highest price a buyer is willing to pay). The difference between these two prices is the bid-ask spread, and it acts as a built-in cost. Even small spreads can accumulate over multiple trades, reducing your net returns. For active traders, this cost compounds quickly—especially in markets with wide spreads.

• Market Liquidity: The size of the spread is a direct reflection of market liquidity and trading activity:

  • Narrow spreads indicate a healthy market with many buyers and sellers actively placing orders, making it easier to enter and exit positions at favorable prices.

  • Wide spreads suggest thin liquidity, meaning fewer participants and potentially higher volatility. In such conditions, executing large orders can significantly impact the market price.

  A consistently tight spread is often a hallmark of highly traded pairs like BTC/USDT or ETH/USDT, whereas niche altcoins might have wider spreads and higher execution risk.

How to Incorporate Spread into Your Trading Strategy?

The bid-ask spread, while seemingly small, can impact your trading outcomes, especially when dealing with large orders or in volatile markets. Here's how to factor it in for both long and short positions:

Going Long

When entering a long position, your buy order is executed at the lowest ask price. This means the market price you see on the chart (the highest bid price) is not the price you'll actually pay. To ensure your order is filled when the market reaches your desired entry point, you need to add the spread to your buy order.

Going Short

Conversely, when entering a short position, your sell order is executed at the highest bid price (the market price you see on the chart).

But when you exit a short position, your buy order is executed at the lowest ask price, which includes the spread. This means you'll need the price to drop further than your initial target to cover the spread and achieve your desired profit.

Factoring in the Spread

Let's say you want to buy 50 Dogecoin (DOGE) when its market price reaches $0.07, and the spread is $0.001. To ensure your order is filled, you should place a limit buy order at $0.071 (the ask price).

If you were to go short on DOGE at the same price with the same spread, you would place a limit sell order at $0.069 (the bid price).

The Bottom Line

By understanding how the bid-ask spread affects your entry and exit prices, you can:

• Avoid missing out on trade opportunities due to incorrectly placed orders.

• Set realistic profit targets and stop-loss orders that account for the spread.

• Choose trading pairs with tighter spreads (higher liquidity and trading volume) to minimize trading costs.

What Is Slippage?

Slippage happens when your order executes at a different price than expected, often due to volatility or low liquidity.

• Negative slippage: Price moves against you before execution

• Positive slippage: Price moves in your favor

Example: You place a buy order for ETH at $1,800, but it executes at $1,810 due to rapid price movement.

How Does Slippage Work?

Slippage often occurs when using market orders, which are executed immediately at the best available market price. If there isn't enough liquidity to fill your order at the expected price, or if the market experiences sudden volatility, your order might be filled at different price levels, resulting in slippage.

Factors that Can Cause Slippage

Slippage is primarily caused by two factors:

• Market Volatility: In highly volatile markets, prices can change rapidly, even within seconds. When you place a market order, it's executed immediately at the best available market price. If the price changes significantly between the time you place the order and the time it's filled, slippage occurs.

• Liquidity and Trading Volume: Low liquidity means there aren't enough buyers and sellers to absorb large orders at a specific price level. When you place a large buy order, for example, you might consume all the available liquidity at the lowest ask price. To fill the rest of your order, the exchange has to move up the order book, resulting in higher prices and negative slippage.

The type of order you use can also affect your susceptibility to slippage:

• Market Orders: These orders are executed immediately at the current market price

  , making them highly vulnerable to slippage, especially in volatile or illiquid markets.

• Limit Orders: Limit orders allow you to specify the maximum price you're willing to buy or the minimum price you're willing to sell. While they offer more control over your execution price, they might not be filled if the market doesn't reach your desired price level.

How to Minimize Slippage?

While positive or negative slippage is an inherent part of trading, proactive strategies can help you minimize its impact. Here are some approaches to consider:

Prioritize Liquid Markets

The golden rule of minimizing negative slippage is to trade in liquid markets with high trading volume. These markets typically have tighter bid-ask spreads, meaning less room for price movement between the time you place a buy order and when it's filled.

How to Identify Liquid Markets:

• High 24-hour Trading Volume: Look for cryptocurrencies with high 24-hour trading volume. High levels of market activity ensure ample liquidity and lower the risk of slippage. At the same time, check the historical trading volumes of a cryptocurrency to ensure consistent liquidity. Spikes in volume can be misleading if not part of a sustained trend.

• Depth of Order Book: Check the order book for depth and a large number of active buyers and sellers. A deep order book with orders at various price levels close to the current market price is a reliable indication of high liquidity.

Use Limit Orders

Limit orders are your shield against unexpected negative slippage. Unlike market orders, which execute immediately at the prevailing market price, limit orders allow you to specify the exact price at which you're willing to buy or sell.

By setting a limit order, you gain more control over your execution price and eliminate the risk of negative slippage caused by sudden price movements. However, be aware that if the market doesn't reach your specified price, your order may not be filled.

Time Your Trades Wisely

Market volatility often follows a cyclical pattern. Trading during periods of high volume and lower volatility can reduce the risk of negative slippage, which typically involves trading during peak hours when more traders are active in the market.

Avoid placing large orders during periods of high volatility or thin liquidity, as this increases the likelihood of negative slippage.

Break Down Large Orders

If you need to execute a large order, it's often advisable to break it down into smaller buy orders and execute them gradually. This reduces the chance of your order consuming all the available liquidity at a particular price level, thus preventing drastic price movements and subsequent slippage.

Choose Your Trading Platform Wisely

The exchange you choose can impact your slippage experience. These platforms often partner with or incentivize market makers to provide liquidity, ensuring there's always sufficient trading volume and activity to minimize slippage.

Additional Tips:

• Use Stop-Loss Orders:Even with these precautions, slippage can still occur in extremely volatile conditions. Setting stop-loss orders can protect you from excessive losses if the market moves unexpectedly against you.

• Monitor the Order Book: Keep an eye on the order book to gauge the depth of the market and potential price levels where slippage might occur.

• Be Patient: Don't rush into trades, especially in illiquid markets. Take your time, assess the situation, and execute your orders strategically.

What Is the Difference Between Slippage and Bid-Ask Spreads?

While both impact the final price you pay or receive in a trade, they have distinct characteristics:

Bid-Ask Spread:

• Definition: The difference between the highest bid price (what buyers are willing to pay) and the lowest ask price (what sellers are willing to accept).

• Visibility: A constant, visible gap on the order book.

• Impact: Represents the immediate cost of executing a market order due to the difference in buy and sell prices.

• Influenced by: Liquidity and trading volume (tighter spreads in liquid markets), and

  market maker activity.

• Example: If Bitcoin's bid price is $29,950 and the ask price is $30,000, the spread is $50. A market buy order would execute at $30,000, and a market sell order would execute at $29,950.

Slippage:

• Definition: The difference between the expected price and the execution price of a trade.

• Visibility: Not always visible beforehand; occurs during trade execution.

• Influenced by: Market volatility, liquidity, order size (large orders are prone to slippage), and order type (market orders are more susceptible to slippage).

• Example: You place a buy order for Ethereum at $1,800, but due to a sudden price surge, it executes at $1,810, resulting in negative slippage.

Key Takeaway: Think of the bid-ask spread as the known cost of entering the market, while slippage is an unpredictable factor that can arise when you execute the trade, especially in fast-moving or illiquid markets. Understanding both is crucial for managing your trading costs and making informed decisions in the crypto market.

Disclaimer: This material is for information purposes only and does not constitute financial advice. Flipster makes no recommendations or guarantees in respect of any digital asset, product, or service. Trading digital assets and digital asset derivatives comes with a significant risk of loss due to its high price volatility, and is not suitable for all investors. Please refer to our Terms.