Cryptocurrency is without a doubt the most rapidly expanding trading sector these days. As more individuals enter the crypto realm or trade, numerous new aspects emerge that are always developing. As a result, it is critical for the trader to be aware of slippage.
Slippage is the discrepancy between the expected price of the cryptocurrency purchased and the price actually obtained when the order executes. In this essay, we will go through the topic of What Is Slippage in Cryptocurrency in depth.
What Is Slippage in Crypto?
Slippage in crypto usually comes into practice when the execution price of the trade is dissimilar from its requested price i.e. Slippage is the contrast between the price expected to get on crypto that is ordered and the price received when the order comes into action is executed.
Slippage happens usually in high volatile and speedily moving markets prone to unanticipated quick turns in certain trends. This mainly happens when the market orders couldn’t match the preferred and expected prices.
Why Is Slippage So Common In Cryptocurrency?
Slippage occurs in all markets, but it is especially noticeable in cryptocurrency markets. This is owing to the extraordinary volatility of cryptocurrencies, which see tens of thousands of transactions every hour. Furthermore, the majority of cryptocurrencies vary in terms of price.
This is the amount of time it takes for an investor to submit, order, and fill a bid. This might alter several times in that short period of time. Demand, however, is not the sole factor influencing trade rates and slippage.
Why Is It Important To Calculate Slippage?
Calculating slippage is critical for each deal in order to reduce possible losses. However, it may be difficult when dealing with an asset as volatile as some cryptocurrencies. It is common practice to quantify slippage in order to prevent potential harm or loss. As a result, it is critical to consider slippage on each deal by reducing possible slippage when purchasing volatile cryptocurrencies.
Reasons Why Slippage Occurs In Cryptocurrency Trading
There are two basic and primary reasons why slippage occurs in Crypto trading are Liquidity and Volatility. Because of how frequently bitcoin and other very popular cryptocurrencies are exchanged at various rates, the price of bitcoin or other hugely popular cryptocurrencies is considered volatile.
Liquidity
One of the main reasons why slippage occurs in Cryptocurrencies is due to lack and deficiency of liquidity. Some cryptocurrencies are not very popular compared to most of the cryptocurrencies and therefore such unpopular cryptocurrencies are not traded very much. Therefore because of its unpopularity and not being traded problem, the difference between the lowest ask and the highest bid is wide which causes a drastic change in the price both before an order is placed and after the order has been executed.
Due to this factor, cash-out the cryptocurrency which is not popular is difficult i.e. they become illiquid because they have lesser or no buyers. Low liquidity cause slippage because the number of asking prices in a bid will be less when there are only a few buyers.
Volatility
Slippage occurs during Volatility because the price changes quickly and the price at which the order is executed will drastically change from the price at which the order was entered into the market.
The trader might expect to get the price they enter the order at but due to the swaying of the price, their order will be executed at an entirely different price. Cryptocurrencies are still very unsubstantial because of their novelty in the market and as a result, there will be an increase or decrease in the price with just a single headline.
Slippage Can Happen In Both Ways – Positive And Negative
As a Buyer;
- Positive slippage is when the price of the cryptocurrency decreases increasing the customers buying power.
- Negative slippage occurs when cryptocurrency gains its price. This will reduce the buying power. This will result in a worst value than expected.
It is vice versa in the case of Sellers.
How To Calculate Slippage
Slippage may be stated in two ways: one as a monetary amount and the other as a percentage. Slippage doesn’t necessarily have to be a bad thing. When the sum is negative, it indicates that a lower price than expected will be obtained. A positive sum, on the other hand, indicates that a higher price than predicted was received.
Most trading systems represent slippage as a percentage, and it is critical to understand how to calculate it in addition to the cash amount. The percentage of slippage is calculated by dividing the dollar amount of slippage by the difference between the projected price and the lowest possible execution price.
Ways To Limit CryptoCurrency
The most supreme way to limit slippage is to place limited orders for cryptocurrencies and it is efficient to avoid market orders as they are implemented very quickly and with whatever the current price is. There will be no control over the prices if entered into the market.
This is the case only when Cryptocurrencies are not very popular or have any other factors that will result in the drop-down of prices. Market orders can be efficient and the cryptocurrencies can be executed with a high guarantee if it is popular and can bring good results.
Slippage can be a serious issue during the time of trading cryptocurrency based on how volatile the market is. When there is a quick shift of changes in the price, the odds of a trader getting a different price from what they expect to get are high. The traders of Cryptocurrencies should be well prepared to deal with slippage, learn how and when to calculate efficiently and effectively, and most importantly should learn how to limit orders that can help reduce or totally eliminate slippage.
Limiting orders helps in reducing slippage as the highest possible price that an individual is willing to pay for a cryptocurrency can be set or the lowest possible price an individual is willing to sell for the cryptocurrency.
Conclusion
To summarise, slippage is an inherent aspect and it is considered as a bitcoin loophole that traders should not ignore while trading cryptocurrency to make money. As a result, we feel the previous post about Slippage In Cryptocurrency achieved its aim.