Cryptocurrency Slippage – How to Tackle It With Counter-Measures? – In this article, we will explain cryptocurrency slippage. We will cover what slippage is, why it happens, and how to avoid it.
Slippage is the difference between the price you want to buy or sell a cryptocurrency versus the actual price at which your order gets filled. If you plan to buy the crypto Polkadot for $500 but wind up paying $505, that is a slippage of 1%. If you wanted to pay $500 but wound up paying $550, that is 10% slippage.
Slippage can happen in either direction; if you sell your crypto for less than expected due to the high amount of orders placed above yours, this also counts as slippage. The article has a basic consideration that the reader has some idea about cryptos, and it does not intend to answer crypto fundamentals, like what is DOT.
Table of Contents
Why Does Slippage Occur?
It is a jarring experience for any cryptocurrency investor, especially those new to the digital asset class. You have your order form up and are ready to execute your trade when you notice that the price is different from what you expected. What happened? Slippage!
Slippage occurs because of rapid price movements in cryptocurrency markets. The reason why slippage happens is that cryptocurrency exchanges can be slow to update their prices. So, when you submit an order, say for DOT, it may take the exchange a few seconds or even minutes to catch up with recent market movements. By then, it may be too late!
Since most orders get executed at market price, if the price has already moved by the time an exchange updates its price feeds, your order will get executed at a different (and possibly less favorable) rate.
If you are a new trader who is still unsure of how to buy Polkadot or DOT, you can opt for any exchange offering a mobile or desktop platform for the same. You can get solutions that can ease your process of buying crypto, like Polkadot, and help you with real-time just-in-time pricing so that slippage does not occur on the platform.
What Are Bid-Ask Spreads?
So, you know why you are buying the currency and can put forth an answer to the question as to how to buy DOT. The next step is understanding the bid-ask spread.
The bid-ask spread indicates the price range of a coin. The coin will have a wider spread if it is more common. The wider the spread, the greater risk gets involved in your purchase because you are buying at a higher price than you are selling it. However, those willing to take these risks get rewarded with good profit potential on top of their initial investment. You should have a clear answer at this stage to the question – why should I buy DOT?
5 Ways to Avoid Slippage
Cryptocurrency slippage is a common occurrence with buying cryptocurrencies. It can get caused by several different things, and it is important to know how to navigate the market during times of high volatility to avoid trouble.
- Limit orders are not transferable. Since your limit order will not get executed until a price gets reached, it is best to use limit orders as a last resort when you want to stop losing money.
- Margin trading is risky. It means your entire portfolio can potentially change hands, especially when there is volatility.
- You can do your research before investing too heavily in any coin or token.
- It is better to trade little by little rather than try to pick up large chunks at once.
- The markets are highly speculative, so don’t bet all your money on one thing. Baiting losses will increase risks rather than decrease them!
Spreads on Some Coins Are Larger Than Others
Another factor that can drive up your slippage is the spread. The spread is the difference between the buy price and sells price on an asset, defined as (sell_price – buy_price) / buy_price.
On some coins, spreads can be significantly higher than on others, and this can also cause slippage in your trades. It takes more work for the exchange to fill your order at a reasonable price when there are such large spreads between bids and asks.
How to Work Out the Spread?
You can look at the order book on your exchange to work out the spread percentage for the cryptocurrency you are interested in trading. You will be able to see the highest bid price and lowest ask price for that particular coin. Subtract these two prices and then divide them by the mid-market price.
The above will give you your spread percentage. If your spread is 0.5%, it could get executed at a slightly higher or lower price than the current market price when you place a market order. It can result in you paying more or receiving less than the market rate.
If you notice that the spread is small on a coin (and thus insignificant), I would suggest using a market order without worrying about slippage. However, if there is high slippage on a coin with low liquidity, I would use an appropriate limit order to avoid paying over the odds or receiving less than the fair value when executing my trades.
An Obvious Phenomenon
Slippage will happen, but you can minimize its impact on your trades by using limit orders instead of market orders. You can also spread your large orders so that they do not get executed at once.
Conclusion
Slippage is an unavoidable aspect of trading cryptocurrencies. It can get minimized by placing orders at the right time and at the right price. Using limit order will help minimize it, but it is not guaranteed to work in a rapidly moving market with high volumes.
You can also use an extra order above or below the current market price to ensure that your order gets executed. It is crucial to place your orders at the right time and at the right price if you want to minimize slippage when trading cryptocurrencies.
