When it comes to cryptocurrency, there are a lot of complex terms you need to know, and it’s especially important that you learn about each specific term in thorough detail if you’re thinking about actively investing in crypto anytime in the near future.
If you’ve ever traded in any kind of financial market at all, you’ll probably be aware of the term ‘slippage’ and how it impacts trade.
But, in crypto, slippage is even more important to understand because it has even more of an effect on trade than usual, due to certain unique attributes.
So, if you’re looking to get into crypto, you’ll obviously want to reduce the risk of any losses as much as you can, which means that understanding everything there is to know about slippage and the effect it actually has on trade is vital.
Read on to find out everything you need to know about what slippage is in crypto!
What Is Slippage In Crypto?
Slippage in crypto is a potentially costly issue that occurs when a trade is carried out for a different price than what the trader originally expected or requested.
This is due to the price changing between the time the order entered the market and the time the trade was actually carried out.
Slippage can either be good or bad for traders, depending on whether they incur positive or negative slippage.
If positive slippage occurs, it means the price the trade is executed for is actually lower than the originally expected price, so this is good news for traders when it comes to buying crypto since it will cost them less to purchase.
However, if negative slippage occurs, it’s bad news for traders because it means the price the trade is carried out for is actually higher than the originally expected price, meaning they have to pay more to purchase the crypto they require than they had originally intended.
Meanwhile, if traders want to sell crypto rather than buy it, the opposite is true for them – positive slippage is bad for them because they lose expected money, whilst negative slippage is good for them because they get more money than they had originally hoped for.
Slippage is something that can occur in any market, such as in stocks, but it’s far more prevalent and costly when it happens in crypto markets because of the high volatility level that occurs in crypto.
Why Does Slippage Occur In Crypto?
As touched upon in the previous section, slippage occurs more frequently in crypto markets than in any other market. There are two main reasons for this: volatility and liquidity. Below is an explanation of what each one entails.
Crypto markets are considered volatile due to the price of popular crypto markets, such as bitcoin, changing extremely rapidly.
This allows for slippage to occur because, as the price changes so quickly, the price that the order is then executed for also changes dramatically from the original price that the order was entered at.
Crypto markets are a fairly new phenomenon, which means they’re quite speculative (see also ‘What Are Speculative Stocks?‘). So, as a result, it only takes one headline in a newspaper to trigger a huge increase or decrease in the price of a crypto market.
A good example of how crypto markets can be influenced extremely easily is when, back in 2021, as soon as the prominent figure Elon Musk added #bitcoin to his Twitter bio, bitcoin then instantly spiked by 20 percent.
Slippage also occurs in crypto due to a lack of liquidity, which is basically when an asset can’t easily be converted into cash. This usually happens when certain cryptocurrencies aren’t traded frequently due to them not being very popular amongst traders.
Because assets that are low in liquidity don’t always have traders willing to buy them, it means they can’t be converted into cash simply due to the fact that no one wants to purchase them.
So, this means that low liquidity can cause a large amount of slippage because, since they barely have any buyers, there won’t be that many asking prices for them.
How Do You Calculate Slippage?
Slippage can be conveyed in two different ways – either in a dollar amount format or as a percentage. But, you always have to work out the dollar amount before you can work out the percentage.
To calculate the dollar amount, you have to subtract the originally expected price from the price the trade was actually carried out for.
Then you should generally always convert this into a percentage as most platforms involving trade express slippage as a percentage.
To calculate the percentage using the dollar amount, simply divide the dollar amount by the difference in price between how much money you expected to receive and the worst possible amount the trade was carried out for.
Then multiply the number you get by 100 and that’s your slippage percentage.
How Do You Limit Slippage?
Slippage is inevitable in crypto and, whilst it’s practically impossible to avoid completely, there are things you can do to minimize it. Here are a few of the ways in which you can limit slippage:
- Set Stop Loss Orders – You can minimize your losses if you set up a stop loss order when trading as it provides you with a get out clause when the price unexpectedly goes against you.
- Trade With A Fast Broker – If you trade under a broker who executes trades quickly, there’s less time for prices to change whilst orders are being processed.
- Avoid Trading During High Volatility Events – Sometimes it’s difficult to see it coming, but if you can try to avoid trading during events that will heavily influence the crypto market, this will help you avoid slippage.
Slippage is an unfortunate consequence of trading in crypto, mainly due to the high volatility of popular crypto markets, and is almost impossible to avoid.
But, now that you’re aware of how slippage works, why it happens, and how to minimize it, hopefully you can avoid excessively heavy losses whilst buying or selling crypto (see also ‘How To Sell Crypto On Crypto.com‘)!