You must have come across the word “Slippage” if you are an active trader in the cryptocurrency market. It refers to the difference between the expected price of a trade to the actual price at which the trade is executed. Several factors like liquidity and market volatility can influence it.
It can neither work against you nor in your favor and can also lead to potential profits and losses. Check out this blog to learn about the intricacies of slippage, its underlying causes, how to minimize it, and all other aspects.
Slippage is an unavoidable aspect of crypto trading. Every user must have encountered it once or multiple times in their crypto journey. It can significantly impact the outcome of transactions. It refers to the difference between the price at which a trader expects the trade and the price at which a trade is executed.
It occurs when there is a discrepancy between the expected price of a cryptocurrency and the price at which the order is filled. For instance, if a trader places an order of Bitcoin for $100 and the price when the order is executed becomes $150, then the slippage for the order is $50.
Slippage in crypto can occur due to certain factors. They are as follows.
Cryptocurrencies are mostly known for their high volatility. They often show rapid fluctuations in their prices that are completely unpredictable. At times of high market volatility, trade executions might be delayed. At this time, the actual price at which the order was placed might deviate significantly from the intended price.
Liquidity refers to the ease with which an asset can be purchased or sold in the market without causing significant price movement. In a highly liquid market, there are many buyers and sellers who can absorb large orders without affecting the price significantly. However, it can occur when placing a large order in a less liquid market. There might not be enough matching orders in the right place.
The size of an order could also influence this. While placing a large order in any illiquid market, the sheer volume of the order could lead to price movements as it gets filled. This can lead to a trader paying higher prices or getting lower prices while selling.
During times of high network congestion or in decentralized exchanges, delays in order executions can also cause this. This occurs more during heavy trading activities when the blockchain network remains overcrowded.
Slippage takes different forms, each with its own implications and causes. The two major forms are price and liquidity-
This happens when a cryptocurrency’s executed price deviates from the asset’s expected price when the order is placed. This is directly associated with the volatility of the market. For example, if you are placing an order at $100. However, in split seconds, the price of the order at the time of execution rises up to $102. This movement results in a slippage of $2.
This occurs when an order is executed at a different price due to the lack of sufficient buyers and sellers at a desired place level. For example, if you are selling a less popular cryptocurrency in large quantities, there might not be enough buyers at the price you are asking. As a result, a part of your order might get executed at lower prices.
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Slippage can have severe impacts on crypto market traders. It can lead to financial impacts for the traders, as they might buy at a higher price or sell at a lower price than anticipated. High slippage can directly affect profitability during volatile market conditions or high-stakes trades. For smaller traders, this can lead to price distortions. For high-volume traders, it can also damage their investment strategy.
There are several ways that traders can follow to minimize the impact-
The prices of assets in low-volatility markets do not change significantly. So, if investors can trade in low-volatility markets, they can limit the risk of experiencing a slippage. Moreover, the chances can be reduced at the times of most activity as liquidity will be highest during this time. This increases the chances of the trade getting executed quickly at the requested price.
Slippage risk is prevented for an order with a guaranteed stop at an executed price. However, a premium attached to it will be incurred. A limit order will help lessen the risk when the investors enter a trade and look for returns from a successful trade.
The market’s liquidity can vary depending on the time of day when you trade. Trading during higher market hours and at times of higher activity can reduce the chances as more buyers and sellers remain active.
Significant news regarding cryptocurrencies can also trigger sudden price movements. You can reduce the chances of higher slippage by timing the trades to avoid these phases.
This prevalent vulnerability can affect the strategies of many investors. While this term is very common among traders, those who are aware of or strongly understand the different aspects of slippage can gain an edge in designing and deploying crypto strategies. It can greatly impact both risk management and profitability.
Mudrex is one of the best platforms for trading cryptocurrencies. The site also features a user-friendly mobile app. You can download the Mudrex app from the PlayStore and follow it to stay informed about the latest crypto news and make your move.
Read More: Check out the ten best crypto futures trading strategies.
The standard slippage tolerance for most trades is 0.5% to 2%. This is considered a good range for trading on established crypto assets.
If the slippage is too high, the traders might have to pay more per token than intended. Bots can also exploit the tolerance, and the traders might also be susceptible to sandwich attacks or front-running.
This means the order is executed at either 2% more or less than the expected price. It can be a positive or a negative slippage.
