Understanding the bid-ask spread and slippage in crypto trading

What you need to know right away

When trading digital assets, the actual price you pay ( or receive ) may differ from what you see on the screen. This occurs for two main reasons: the bid-ask spread, which is the difference between the buying and selling prices, and slippage, which happens when orders are executed at unexpected prices. Both phenomena represent hidden costs that go beyond visible fees and directly impact the profitability of your trades.

The mechanism of the market: supply and demand

On any cryptocurrency exchange, the price is not fixed but continuously emerges from the interaction between buyers and sellers. Each transaction depends on four key factors: the current market price, the available order volume, the depth of liquidity, and the type of order you choose to use.

This means that your price expectations may not always align with reality. Between those who want to buy and those who want to sell, there is a constant negotiation that creates a space of difference between the two positions, generating what we call the bid-ask spread.

The difference between money and letter: how it forms

The bid-ask spread represents the gap between the lowest price at which a seller is willing to sell an asset and the highest price at which a buyer is willing to pay. In the traditional market, it is brokers and market makers who create this space. In the crypto world, however, the spread naturally arises from the differences between the limit orders placed by the traders themselves.

If you want to buy immediately at the current market price, you must accept the price requested by the seller (the lowest price among the available offers). On the contrary, if you sell immediately, you will receive the price offered by the most favorable buyer (the highest price among the requests).

Highly liquid assets—such as major currency pairs in forex—have a reduced bid-ask spread. This allows traders to execute their orders without causing significant price changes. This feature is directly related to the depth of the order book. When the spread widens, even large orders generate more pronounced price fluctuations.

Who profits from the spread: the role of market makers

Liquidity is the oxygen of financial markets. Without it, you could wait hours or days before finding a counterparty willing to trade the asset you desire.

Market makers fill this gap by taking on the task of providing constant liquidity. In return, they profit from the spread itself: they buy at the lowest price (money) and sell at the highest price (ask), continuously repeating this cycle. Even when the spread is tiny, multiplied by massive volumes and repeated dozens of times a day, it generates significant profits.

Let's consider a practical example: a market maker might simultaneously offer to buy Bitcoin at $65,000 and sell it at $65,001, creating a spread of $1. Anyone who wants to make an instantaneous trade in the market must accept one of these two conditions. That spread represents the arbitrage profit of the market maker.

On highly sought-after assets, the spread tends to narrow as market makers compete with each other to attract more orders, leading to a natural compression of margins.

How to view the money-letter difference

Modern graphic tools allow for direct observation of the spread and the order book. Most exchanges offer a “depth” visualization that graphically shows the structure of the order book: buy orders in green ( with their respective prices and quantities ) and sell orders in red.

The space between these two colored areas visually represents the bid-ask spread. To calculate it numerically, subtract the highest offer price from the lowest request price.

There is an implicit but strong relationship between liquidity and the width of the spread: higher trading volumes generally correspond to narrower spreads. Cryptocurrencies and highly traded assets attract greater competition among traders, who seek to take advantage of the spread to their benefit, thus reducing it further.

Measure the spread in percentage

To compare the width of the spread between different assets, it is essential to express it in percentage terms, as the absolute value alone can be misleading.

The formula is simple: (Bid price - Ask price) / Bid price × 100 = Spread percentage

Let's take two concrete examples. If a meme coin has a bid price of 10 dollars and an ask price of 9.98 dollars, the absolute spread is 0.02 dollars. In percentage: (0.02 / 10) × 100 = 0.2%.

Bitcoin, on the other hand, could have an absolute spread of 2 dollars on a price of 67,000 dollars. In percentage: (2 / 67.000) × 100 = 0.003%.

Although Bitcoin has a greater absolute spread, when expressed as a percentage, it reveals drastically higher liquidity. The meme coin, with fewer traders and orders in the book, shows a wider percentage spread, indicating lower liquidity.

This metric helps you make informed decisions: an asset with a reduced percentage spread is generally more liquid, and if you want to execute a large volume order, you will have lower risks of paying a defective price from what you expected.

Slippage: when the price slips out of your hands

Slippage occurs when a trade is executed at a price significantly different from what you expected. It is particularly common in contexts of high volatility or low liquidity.

Imagine you want to buy a large quantity of an asset at the price of 100 dollars through a market order. If the book does not contain sufficient volume at that price, your order will propagate to the next levels (above 100 dollars), using the available sell orders until your purchase is completed. As a result, the average price of your purchase will rise beyond the expected 100 dollars—this is negative slippage.

Technically, when you place a market order, the exchange automatically matches it with the limit orders present in the book, always starting from the most favorable price. However, if the depth is not sufficient, the algorithm continues to lower price levels, dragging you towards undesirable outcomes.

In the crypto sector, slippage is common in automated market makers and decentralized exchanges. In certain scenarios, it can exceed 10% of the nominal price, especially when trading volatile altcoins or assets with low order circulation.

Positive slippage: the pleasant surprise

Not all slippages are harmful. A positive slippage occurs when the market moves in your favor during the order execution: the price decreases while you are buying, or increases while you are selling. Although rare, it can happen in particularly volatile markets.

Check the impact with slippage tolerance

Many exchanges and decentralized protocols allow you to manually set a “slippage tolerance”—essentially telling the system: “It's okay if my final price deviates up to X% from the reference price.”

However, this setting involves trade-offs. With a very tight tolerance, the order may wait a long time without being executed or remain completely unfilled. If you set a wide tolerance, you risk attracting the attention of other traders or bots that engage in front-running: they see your pending order, anticipate it with higher transaction fees, and subsequently sell you the asset at a higher price, taking advantage of the tolerance space you have granted.

Strategies to Minimize Negative Slippage

Even though you can't completely eliminate it, there are practical approaches to contain it:

Break down large volume orders. Instead of placing a single massive trade, divide it into smaller tranches. Monitor the book and distribute your orders so that none exceed the actual volume available at that price.

Carefully calculate the transaction fees. If you use a decentralized exchange, the gas costs of the blockchain can be significant and vary depending on network congestion. Sometimes these costs exceed the margins you hoped to achieve, negating the advantage of the transaction.

Avoid assets with low liquidity. When liquidity is insufficient, your order has a disproportionate influence on the asset's price. Whenever possible, opt for markets with a stronger order depth.

Prefer limit orders over market orders. A limit order is executed only at the price you desire or at an even more favorable price. It may take minutes or hours to wait, but it represents the most reliable method to avoid negative surprises in terms of price.

Conclusion: the real cost of your trading

Both the bid-ask spread and slippage affect the final price of your trade, in addition to the official exchange fees. It is not always possible to completely avoid them, but incorporating them into your evaluation is essential.

For small operations, these factors remain marginal. However, when managing substantial volumes, the average price per unit can significantly diverge from your initial forecasts. Anyone actively participating in decentralized finance must thoroughly understand how slippage works, or risk losing capital due to front-running or excessive price mismatches. Gaining this awareness is an essential step towards more informed and secure trading.