Crypto Slippage: How to take advantage of the volatile crypto market?

Crypto Trading

Crypto Slippage: How to take advantage of the volatile crypto market?

Last Update: 2022-05-16

Crypto Slippage: How To Take Advantage of The Volatile Crypto Market?

As a crypto trader, you may have often faced money loss due to the volatile crypto market. But do you know that you can also take advantage of crypto slippage? In this article, we have outlined some tips that will assist you in dealing with the sliding crypto market.

In January, only this year, Bitcoin, the popular cryptocurrency, crashed globally, causing one trillion dollars to wipe off the face of the earth. This meltdown happened due to an announcement by the US Federal Reserve on the possibility of increasing interest rates. 

Does this establish the fact that purchasing cryptocurrency will only beget loss? No, it doesn’t. The beauty of cryptocurrency lies in its volatility. If that weren’t the case, then US alone wouldn’t have twenty-seven million crypto owners hedging their bets on the future of crypto.

What is crypto slippage?

Slippage happens when crypto traders request an order on a cryptocurrency exchange and don’t get the same price on order execution as they’ve initially chosen. This price movement can happen in any forex or trade market but more so in crypto markets such as DeFi exchanges due to the high price volatility.

Types of crypto slippage

A liquid or the volatile crypto market does not necessarily mean a loss for a crypto trader. It could also mean a profit gain because there are two types of crypto slippage. One is negative, and the other one is positive.

Positive crypto slippage Negative crypto slippage
Happens when a crypto trader gets a better price than expected on the sell order It happens when a crypto trader receives a lower price than expected on the sell order.
It occurs when the actual price is lower than the original intended price on the buy order. It happens when the confirmed price is higher than the original intended price on the buy order.
Results in profit gain. Results in a loss.

What are the factors that cause crypto slippage?

There are two main reasons why crypto slippage occurs. Due to price volatility in the crypto market and liquidity.

1. Volatility

Volatility is the rapid change in prices across the crypto market, which may be caused by political or economic turmoil in a state. There is not much exposure to the cryptocurrency, and its market is still under speculation, so even a slight whisper or turmoil may trigger the price change. 

In this scenario, crypto slippage occurs when the price rapidly changes between the time when the order enters to when it is executed. It means the crypto trader may get a completely different price at the execution of the crypto order than what they expected when they filled in the order initially. These wild swings in crypto price may result in a profit gain for the crypto trader or may result in a loss. 

2. Liquidity

Another factor that causes crypto slippage is a lack of liquidity in the cryptocurrency market. If a cryptocurrency is not popular or particularly new in the market, there might be a few buyers willing to purchase it. So, the number of asking bid prices will also be fewer. 

For a liquid asset, there will be many buyers, with more asking bids and listing prices closer to the current market rate. On the other hand, sometimes, the low liquidity for cryptocurrency may also mean that no one is willing to buy it. So the seller would have to put a lid on the sale of cryptocurrency and wait for a willing buyer. But even if they come along, they may offer to buy it at less price than the seller expects.

Lack of liquidity also means that the less popular cryptocurrencies cannot be converted into cash. This widens the spread between the lowest ask price and the highest bid price, causing a rapid price change before the entering order can be executed.

How to avoid loss caused by crypto slippage?

Understandably, combating the crypto slippage caused by volatility or liquidity may seem futile for a crypto trader. But it is not an impossible task. Every crypto trader, either a beginner or an experienced one, can benefit by learning some tricks of the crypto trade. 

The first step to avoid slippage is to enter a limit order instead of a market order because the rapidly changing prices on the latter cannot be controlled. The market orders are executed at the current market price, whatever it is at the time of trading. Orders for prominent cryptocurrencies are also guaranteed to execute as soon as they enter the market. Because they always move in the opposite direction of a crypto trader’s orders. 

Placing a limit on orders guarantees a reduction in crypto slippage. Because the crypto trader can set the timeframe, the highest possible for purchasing and the lowest possible for selling cryptocurrencies. But the order might not get filled, so that it will be referred to as the limit order book. This means the cryptocurrency order is good for as long as the price will remain within the set limit and timeframe.

Besides setting limit orders, factors that cause liquidity and volatility must also be considered. A crypto trader should avoid market makers with a high crypto slippage rate at any cost. Also, choosing a broker with a low spread that is not much affected by external factors can reduce the chance of crypto slippage.

Some crypto exchanges, such as Coinbase, also display warnings when crypto traders enter an order with slippage above 2%. 

How to calculate crypto slippage on limit order?

Calculating crypto slippage is vital if a crypto trader wants to minimize potential loss. But it could also be challenging to discern due to the volatile nature of the crypto market. Crypto slippage is expressed in percentage and the dollar amount where the amount must be calculated before the percentage.

To get a dollar amount, the crypto trader must subtract the expected price they wish to receive from the price they actually got. If the difference is positive, it will be called positive slippage, which means there are more crypto buyers than sellers. 

The percentage of crypto slippage can be calculated by dividing the dollar amount by the slippage difference, the expected price, and the worst possible price at the time of execution. The worst expected price also referred to as the limit price, is set when the crypto trader enters a limit order. The amount received after division is further multiplied by 100 to get the slippage percentage. 

Formula to calculate slippage for a limit order is as follows:

Crypto slippage in dollar amount / (LP - EP) x 100 = % crypto slippage.

EP = expected price.

LP = limit price or worse possible price.

Example:

For example, a crypto trader sets a limit to pay for Bitcoin no more than $45500 and enters the order at $45000. But suppose the order doesn’t execute until the price has risen to $45250.

The crypto slippage will be -$250, and further divided by $500, the actual amount of crypto slippage is known to be 0.5%. This value will be further multiplied by 100 to give 50%, the percentage of crypto slippage on a limit order.

FAQs

What is crypto slippage tolerance?

Slippage tolerance occurs when a crypto trader has to pay more or less than the expected price for order execution on the crypto market. It happens due to other crypto traders' recent order executions on the market.

Setting a slippage tolerance can be a risky and frustrating business, especially for beginners in crypto trading. The average percentage to set usually ranges from 0.1 to 0.5%. But it must be set very carefully, neither too low nor too high.

Is low crypto slippage better than high slippage?

It depends on what side a crypto trader is. Are they selling or buying crypto? Low slippage is good for crypto sellers, which means they can sell the cryptocurrency at a higher price than initially expected, making up for what they lost in negative slippage. 

On the other hand, a high slippage can be good news for buyers, which means they can benefit from the higher price’s profit. But while trading crypto, it is advisable for a crypto trader to find a broker who offers a low spread to reduce or eliminate the effects of crypto slippage.

What is the formula to calculate crypto slippage?

To calculate crypto slippage on a particular trading platform, the crypto trader needs to consider the current bid price and the ask price of the cryptocurrency at the time of trading. Then subtract the bid price from the ask price, divide it by quantity, and multiply the total amount by 100% to get the percentage for crypto slippage.

 ( (Bid Price – Ask Price) / Quantity ) * 100%.

Conclusion

For a less experienced crypto trader, crypto slippage can be frustrating due to the rapidly changing prices of cryptocurrency in the market. Liquidity can also cause jarring price changes when there are more buyers in the crypto market than sellers, and they don’t wish to pay the expected price for the ask bid. But the same slippage can be positive or negative. So, a crypto trader needs to be better prepared to reduce slippage by learning to calculate it, limit orders to minimize risk, and profit from the positive crypto slippage.

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