In the fast-paced and ever-changing world of cryptocurrency, it’s important to stay up to date on all the latest lingo.
So what is slippage in crypto? Slippage is a term used in finance to describe the gap between a security’s anticipated price and its current price.
This can be caused by several factors, including volatility in the market, lack of liquidity, or simply human error.
In this article, we’ll explore what slippage is, how it can affect your investment portfolio and some ways to minimize its impact.
1. What Is Slippage In
Slippage is the difference between the anticipated price of a trade and its executed price. Slippage often occurs during periods of high market volatility, or when there is a large order to buy or sell an asset.
When you place an order to buy or sell an asset on a cryptocurrency exchange, you usually expect the trade to be executed at the price you specified. However, due to the nature of the cryptocurrency markets, this is not always the case.
If there is a large order to buy or sell an asset and not enough liquidity in the market to fill it, then the price of the asset will move away from the expected price. This is known as slippage.
Slippage can be a positive or negative experience depending on the direction of the market move.
If the market moves in the direction you were expecting, then your order will likely be filled at a better price than you expected.
However, if the market moves against you, then your order will likely be filled at a worse price than you expected.
In either case, it is important to be aware of the potential for slippage when trading cryptocurrencies and to factor it into your trading strategy.
2. How Does Slippage Affect Traders?
Slippage can have a big impact on traders, especially those who are trading on margin. When you’re buying or selling an asset on margin, you’re essentially borrowing money from the exchange to trade with. This means that your profits (or losses) are magnified.
If you’re buying an asset and the price starts to move against you, the exchange will automatically close your position to prevent you from losing more money than you have in your account. This is called a margin call.
If slippage is large and frequent, it can trigger margin calls more often, which can lead to heavy losses.
Slippage can also affect stop-loss orders. A stop-loss order is an order to sell an asset when it reaches a certain price. The idea is that if the price drops below a certain level, you cut your losses and sell.
However, if there’s slippage, the price at which your stop-loss is triggered can be much lower than the price you set. This can lead to much bigger losses than you anticipated.
It’s important to be aware of slippage when trading and to factor it into your risk management strategy.
3. Factors That Contribute To Slippage
There are a few factors that contribute to slippage, the most important being trade volume and liquidity.
Trade volume is simply the number of trades being made in a given period, while liquidity refers to how easy it is to buy or sell an asset without affecting its price.
In general, the more liquid an asset is, the lower its slippage will be. This is because there are more buyers and sellers in the market, making it easier to find someone willing to trade at the price you’re looking for.
The second important factor is the spread, which is the difference between the bid and asks the price of an asset. The smaller the spread, the less likely it is that you’ll experience slippage.
Lastly, the size of your trade can also affect how much slippage you experience. This is because large trades can be difficult to execute without affecting the price, while small traders are more likely to be filled at the exact price you’re looking for.
There’s no guaranteed way to avoid slippage entirely. However, by understanding the factors that contribute to it, you can minimize your chances of experiencing it.
4. Ways To Minimize Slippage
Limit orders are an alternative to market orders that can help you avoid slippage. A limit order allows you to set a maximum price for a cryptocurrency and a minimum price at which you would want to sell it. By using a limit order, you can trade with more precision and avoid some of the pitfalls that come with market orders.
Another way to minimize slippage is by using a trading bot. Trading bots are software programs that can place trades for you automatically, and they often have settings that let you control how much slippage is acceptable. If you’re serious about trading cryptocurrencies, then a trading bot may be a good option for you.
You can also avoid slippage by trading on exchanges with low fees. Some exchanges charge a flat fee per trade, while others take a percentage of the total trade amount. By using an exchange with low fees, you’ll keep more of your money in your pocket and less will be lost to slippage.
5. Slippage In Practice
Now that we know what slippage is, let’s take a look at an example.
Let’s say you want to buy some Bitcoin on an exchange. The market price for Bitcoin is currently $11,000. You have $110 to spend and you’re willing to pay the current market price. However, the order book only has bids at $11,050 and higher.
In this case, you would have to pay $110 for your Bitcoin, plus the $50 of slippage. This is because no buyers were willing to sell their Bitcoin at $11,000 when you placed your order.
Now let’s say the market price for Bitcoin is $11,000 and you have $110 to spend. However, the order book only asked for $11,050 and higher.
In this case, you would not be able to buy any Bitcoin because no sellers were willing to sell their Bitcoin at $11,000 when you placed your order.
6. The Future Of Slippage
As the crypto industry matures, we’ll likely see less slippage. This is because as more people trade cryptocurrencies, the order book will become deeper.
This means there will be a greater supply of both buyers and sellers, making it easier to find someone willing to trade at the price you want.
Another reason why slippage is likely to decrease in the future is because of the increasing number of institutional investors.
These investors have deep pockets and can therefore afford to place large orders without moving the market too much. This increases the liquidity of the market, which reduces slippage.
There will always be some degree of slippage in any market. But as the crypto industry grows, we can expect this to become less and less of a problem.
Conclusion | What Is Slippage In Crypto
Slippage occurs when, in the middle of a transaction, one party discovers that the value of their money was incorrect and must be corrected.
Slippage happens frequently during periods of high volatility when market conditions are particularly chaotic.
Margin trading can also contribute to slippage, as can placing limit orders too close to the current market price.
Slippage is a major consideration for any trader, but it’s especially important for that trading cryptocurrency.
That’s because crypto markets are still relatively new and lack the liquidity of more established markets like stocks or forex. What’s more, crypto is notoriously volatile, making slippage a common occurrence.
There are a few things you can do to minimize the effects of slippage. First, make sure to use a reputable exchange with high liquidity. Second, try to trade during periods of low volatility. Finally, consider using limit orders rather than market orders.
FAQs | What Is Slippage In Crypto
Q: What is slippage in crypto?
A: Slippage is the amount by which the trade execution price differs from the deal quotation. It can happen due to several reasons, but most often it’s due to liquidity issues in the market.
Q: What causes slippage in crypto?
A: Slippage can be caused by several factors, but the most common cause is a lack of liquidity in the market. When there aren’t enough buyers or sellers to match up with each other, the prices can start to move around and this can cause slippage.
Q: How can I avoid slippage in crypto?
A: The best way to avoid slippage is to trade on a well-liquid exchange. This way, there will always be plenty of buyers and sellers to match up with each other and you’re less likely to experience any price movement.
Q: What is the best way to trade crypto if I want to avoid slippage?
A: The best way to avoid slippage is to trade on a well-liquid exchange. This way, there will always be plenty of buyers and sellers to match up with each other and you’re less likely to experience any price movement.
Q: What is the worst-case scenario for slippage in crypto?
A: In the worst-case scenario, you could end up paying more for your trade than you originally intended. This is why it’s important to always check the prices before you execute a trade.
