Bid-ask spread and slippage: How they affect your crypto trades

Introduction: Why the Actual Trading Price Differs from the Expected

When you enter the crypto market, it seems simple: press the buy button, receive the asset at the stated price. However, in reality, it's more complicated. Between the moment you decide to trade and the moment the transaction completes, processes occur that can change the final buying or selling price.

Two key phenomena that every trader needs to understand are the bid-ask spread and slippage. Both directly impact your actual trading costs, even if it seems like you are paying the exchange's commission. A lack of understanding of these mechanisms can cost you significant money, especially with large trades.

Demand and Supply Dynamics: How the Bid-Ask Spread is Formed

On any cryptocurrency exchange, there is a constant struggle between buyers and sellers. This struggle creates the basis for the bid-ask spread — the difference between the highest price that buyers are willing to offer (bid) and the lowest price at which sellers are willing to sell (ask).

Let's consider a specific example. If you want to buy immediately, you need to accept the seller's ask price. If you want to sell immediately, you will receive the bid price from the buyer. The difference between these two prices is the spread that the trader pays when executing a market order.

In traditional financial markets, spreads are created by market makers and brokers. In cryptocurrency markets, spreads occur naturally from the difference between limit orders of buyers and sellers in the order book.

The Role of Liquidity in Spread Formation

The most liquid assets, such as Bitcoin, have a narrower bid-ask spread. This means that a large number of traders are willing to buy and sell simultaneously, so the prices of buyers and sellers are close to each other.

In contrast, less popular altcoins with low liquidity have wider spreads. When there are few orders, the difference between the bid and ask increases, as the seller requires a larger margin to compensate for the risk.

For example: imagine that Bitcoin is trading with a bid of $64,999 and an ask of $65,000. The spread is only $1. At the same time, a less popular token may have a bid of $0.95 and an ask of $1.05, with a spread of $0.10. Although the absolute difference is small, in percentage terms the spread of the second asset is much larger — approximately 9.5% compared to 0.0015% for Bitcoin.

How market makers earn on the spread

Market makers are market participants who simultaneously stand in queues to buy and sell. They buy an asset at the lower bid price and sell it at the higher ask price. Even if the spread is only a few cents per coin, trading large volumes throughout the day can yield significant profits.

For example, the market maker places an order: buy BNB for $799 and sell it for $801. The spread is $2. If the market maker executes such trades thousands of times a day, the profit accumulates quickly.

High-demand assets have a competitive spread as many market makers compete for orders, narrowing the spread for attractiveness. Low-demand assets have larger spreads since there are few market makers, and they can afford a larger margin.

Calculation of Percentage Spread: A Practical Method

To fairly compare the spreads of different assets, it is necessary to bring them to a single metric — the percentage spread. The formula is simple:

(Ask Price − Bid Price) / Ask Price × 100 = Bid-Ask Spread Percentage

Let's consider a real example. Suppose the TRUMP token is trading with an ask of $9.44 and a bid of $9.43. The difference is $0.01. Let's divide: 0.01 / 9.44 × 100 = 0.106%.

In contrast, Bitcoin with a spread of 1 dollar at a price of $65,000 will have a spread percentage of: 1 / 65,000 × 100 = 0.00154%. Although the absolute spread of Bitcoin is larger, its spread is negligible in percentage terms.

This calculation shows why more liquid assets are better for large transactions — the spread percentage is significantly lower.

What is slippage and how does it occur

Slippage is a phenomenon where your order is executed at a price different from what you expected. It most commonly occurs when placing large market orders on assets with low liquidity or during sharp market fluctuations.

Imagine you want to buy a large volume of coins at $100. However, there are not enough coins at that price in the order book. The system will start activating the next sellers' orders - at $100.50, then $101, then $102. By the time your order is fully executed, your average purchase price will be significantly higher than $100.

In decentralized exchanges and automated market makers (AMM), slippage is particularly noticeable, as liquidity is distributed differently than on centralized platforms.

Positive sliding: Luck is on your side

Slippage doesn't always work against you. Positive slippage occurs when:

• You place a buy order, and the price suddenly drops.
• You place a sell order, and the price suddenly rises.

In this case, you will win by getting a better price than you expected. However, this happens rarely.

Allowable Slippage: Risk Control

Many decentralized platforms allow you to set a maximum slippage level before executing a trade. This informs the system: “Execute my trade, but only if the price differs by no more than X%.”

However, this parameter is balancing:

• Low slippage: Your order may wait for a very long time or may not be executed at all.
• High slippage: Other bots or traders may notice your order with a large spread and take advantage of front-running — setting a higher transaction fee to be the first to buy the asset, and then reselling it to you at the maximum price you are willing to pay.

Practical ways to minimize slippage

Although it is impossible to completely avoid slippage, you can significantly reduce its impact.

1. Break large orders into parts

Instead of placing one large market order, split it into several smaller orders. Carefully monitor the order book and distribute your orders so that each does not exceed the available volume at the given price level.

2. Take into account the network fees

If you are trading on a decentralized platform, be sure to account for the transaction fee (gas fee). On congested blockchains, these fees can become quite significant — sometimes greater than the profit you expect to make.

3. Choose assets with higher liquidity

Assets with a small liquidity pool carry a much higher risk of slippage. Even an average trade can significantly impact the price of such an asset. Whenever possible, prefer trading on more liquid markets.

4. Use limit orders instead of market orders

A limit order is executed only at the price you specify or better. While this may take more time, it is the most reliable way to avoid negative slippage. You are guaranteed to receive the desired price or the order will not be executed at all.

Practical recommendations for depth chart analysis

Most cryptocurrency exchanges provide a tool that displays a depth chart — a graphical representation of the order book. On this chart, you can see:

• Green side ( left ): buy orders with bid prices
• Red side ( rights ): sell orders with ask prices
• The gap between them: bid-ask spread

By analyzing this chart, you can quickly assess the liquidity of the asset. A steep chart indicates concentrated liquidity near the current price — this is good. A flat, dispersed chart indicates scattered liquidity — a greater risk for you as a trader.

Conclusion: Conscious Trading as a Safeguard

The bid-ask spread and slippage are an inherent part of crypto trading. These phenomena affect every trade you make, even if you don't notice them. Their impact is minimal on small trades, but when trading large volumes, they can cost you dearly.

Understanding how spreads and slippage work allows you to make more informed decisions. You will learn why a particular asset is better suited for large trades, how to determine a fair trading fee, and how to optimize your trading strategy to minimize losses.

Without this basic knowledge, you risk overpaying for every deal without understanding why. Instead, armed with this information, you will be able to trade more efficiently and profitably.