What Is Slippage In Crypto?
As you get into crypto trading, you will come across the term “slippage”. It’s a common term in crypto markets and can impact your trades big time. In this guide we will explain what slippage in crypto is, why it matters and how to avoid it.
What Is Slippage?
Slippage in crypto means the difference between the expected price of a trade and the actual executed price. In simple terms, it’s the loss or gain when you buy or sell a crypto at a different price than what you wanted. For example, if you place a buy order for Bitcoin at $100,000 but the actual executed price is $101,000, the slippage would be $1,000.
You might be thinking, “Well, my order was placed at $100,000 so why did I pay more?” This is because crypto markets are super volatile and the price can change fast. Slippage occurs when there is not enough liquidity in the market to fill your order at the price you wanted. So the exchange will fill your order at the next available price and that’s slippage.
What Causes Slippage?
Now that we know what slippage is let’s look at what causes it. There are two main reasons for slippage in crypto – market volatility and order size.
Market Volatility
Cryptocurrency markets are super volatile, meaning the prices of cryptocurrencies can change fast and big. This can happen due to various reasons such as news, market sentiment or large buy/sell orders. As a result, the actual executed price may be different from the expected price and that’s slippage.
This is something traders need to be aware of as it can impact their profits and losses big time. Higher volatility means a higher chance of slippage. Small cap (low market capitalization) coins tend to be more volatile and therefore more slippage than large cap coins like Bitcoin or Ethereum.
Order Size
Another reason for slippage is the size of your order. In highly liquid markets small orders won’t cause much slippage as there are enough buyers and sellers to fill them. But if you place a large order it can impact the market and cause slippage. If there are not enough buyers or sellers to fill your order the exchange will fill it at a different price and that’s slippage.
When it comes to cryptocurrency trading you need to consider the order size and its impact on slippage. Large orders paired with high volatility mean a higher chance of slippage. That’s because a sudden price movement can quickly drain the liquidity and leave you with less favorable execution prices.
Does Slippage Matter In Crypto?
Yes, slippage does matter in crypto. If you are a trader looking to make profits from short term price movements slippage can impact your gains or losses. Even for long term investors minimizing slippage can help maximize their returns over time.
To understand why slippage matters in crypto we can use the example of Don the trader. Don trades small amounts of Bitcoin and one day he buys 0.5 Bitcoin for $50,000 and expects to sell it for $51,000.
But due to the order size and market volatility, the actual executed price is $50,500. So Don’s profit has gone from $1,000 to $500 due to slippage. If he doesn’t account for slippage in all his trades it can impact his overall profitability.
How Do You Avoid Slippage In Crypto?
Here are several ways to minimize slippage in crypto trading.
- Place limit orders: A limit order allows you to set a specific price at which your order will be executed and you won’t buy or sell at an unfavorable price due to slippage.
- Use stop-loss orders: A stop-loss order will sell your assets if the price reaches a certain level and limit your losses in case of sudden market movements.
- Choose exchanges with high liquidity: Liquidity means the number of buyers and sellers on an exchange. Choose an exchange with high liquidity and your orders will be executed at the price you want with minimal slippage.
- Diversify your trading: Instead of relying on one exchange, trade across multiple exchanges to access more liquidity and potentially less slippage.
- Monitor the market: Slippage can happen due to sudden market movements or news events. Monitoring the market and staying informed can help you anticipate slippage and adjust your trading accordingly.
To better understand how you can use these strategies to minimize slippage let’s go back to Don’s example. Instead of a market order, Don could have placed a limit order at $100,000 per Bitcoin. That way even if the price moved Don would have avoided significant slippage. That’s because with a limit order,r Don’s trade would have only filled at the specified price or lower.
Similarly, if Don had set a stop-loss at $95,000 per Bitcoin he would have limited his losses in case of a sudden market drop. And by trading across multiple exchanges and monitoring the market Don could have also minimized slippage. Some exchanges have more users and liquidity so more buyers and sellers are willing to make the specific trade Don was looking for.
Conclusion
Slippage is a natural part of trading and while it can’t be eliminated there are ways to minimize its impact on your trades. By understanding what causes slippage and using strategies like limit orders and diversifying your trades you can increase your chances of executing trades with minimal slippage.
