What is slippage in crypto? Many newbie investors and traders think that the same market dynamics in stocks apply in crypto.
There is really no difference in overall strategy: It's all about buying low and selling high. The difference, of course, is your profit.
But given the fact that crypto-assets are still going through a tremendous growth stage, there are many different platforms currently available, and these different exchanges can suffer quite a bit of volatility.
One key problem in crypto trading that investors and traders need to be aware of is slippage or "price slippage " which is caused by price volatility.
But what is slippage in crypto?
What Is Slippage on a Cryptocurrency Platform?
Usually, when people buy any kind of investment asset, they want to lock in on the exact price (or expected price) they chose.
Slippage occurs when there's a difference in the expected price and what actually happened (the final execution price).
Slippage has always been a part of the cryptocurrency markets and it will continue to be.
Given the volatility of cryptocurrency assets, investors can't expect the same certainty with Bitcoin and Ethereum. In fact, less well-known crypto assets are even more volatile. Volatile markets mean higher slippage.
Basically, slippage is when the price that you thought you would get for your trade doesn't match what happens in reality because of market volatility and time delays. Crypto markets are volatile so higher slippages will naturally occur.
A buying trader and a selling trader who settled a price different than both of them originally requested.
Please note that in any kind of exchange, there is always the bid and ask price.
While the buyer and the seller can be firm in both their bid and ask prices, the price of the asset such as Bitcoin can change quite a bit in the time it takes from the entry of the order to the transaction's execution. This is where the exchange matches the bid with the ask price to close a transaction.
While this does happen with stocks, it tends to happen more often with crypto because of the volatility of this investment asset.
Not All Exchanges Are the Same When It Comes to Slippage
If you are trading established cryptocurrencies like Ethereum and Bitcoin, even though these assets may be volatile, you are more likely to lock in on the price where you want to buy in or sell out.
This can't be said of alternative coins, which are less well-known than ETH or BTC. These are crypto assets have different levels of exchange adoption. Some decentralized exchanges would allow traders to buy and sell these, while others won't. For example, Crypto.com currently has 162 coins available on their exchange.
This is where investors in altcoins face the most slippage issues. The common pain point here is the fact that a lot of altcoins have low trading volume and low liquidity.
Note that most of the crypto trading action revolves around Bitcoin and Ethereum as well as a handful of other well-known cryptocurrencies. You can just get by if you only deal with these major cryptocurrencies.
But if you want to capitalize on lesser-known crypto that you think is going to break out soon, you have to deal with the slippage issue.
Different Types of Slippage
There are two types of slippage: positive and negative.
A positive slippage happens when a cryptocurrency's price falls. This means that when you place your order for 100 units of a crypto coin for $10 each, you may be able to complete the order at a lower price because, by the time the exchange gets to your order, the underlying crypto's value has dropped below your $10 price target.
So if it benefits you, that's positive slippage.
On the other hand, negative slippage happens when a buyer puts in an order for a set price — let's say $10 —, but the order is filled at $10.50 because of the rise in the value of the traded crypto.
In this situation, instead of buying at $10 per unit, you are forced to buy at $10.50 apiece. For an investment of $1000, instead of getting 100 units, you end up only getting 95.24 units.
Keep in mind that crypto slippage tends to happen on certain exchanges. The less crypto available on an exchange, the more stable the liquidity as well as the volume of the crypto available for trading.
On the other hand, if you are interested in lesser-known coins, you might want to try decentralized exchanges. This can get a little bit tricky because of the low volume and liquidity involved, especially when it comes to newer coins.
You're more likely to find yourself in a situation where the bid-ask margin changes many times in a very short period of time. By the time you submit an order and your order is filled, you may have suffered quite a bit of slippage.
How to Prevent Slippage in Crypto Trading?
One way to avoid slippage is to use slippage tolerance control. Some exchanges have this feature. You can choose whether you're looking for positive or negative slippage.
The broker will fill your order depending on your preference. If the price moves past the tolerance level that you have set, let's say 0.10%, the order doesn't go through.
Limit orders and market orders have different purposes. Market orders, in particular, can be problematic since they allow the price to move against you before settling. Limit orders avoid slippage by allowing traders to place bids without having to worry about getting hit by a market order at a later date.
You can set your price tolerance which will help to avoid slippage on limit orders. This is a great way for market participants to protect themselves from sudden price movements and ensure that the trade goes through at the desired price.
In addition, stop-losses can also help you to control slippage by automatically selling your assets when they fall below a certain price.
Another option you have is to invest in cryptocurrency ETFs instead (or mutual funds) instead of buying crypto. While you won't own cryptocurrency, you will be investing in the companies that invest in cryptocurrency or blockchain technology, so you won't have to deal with slippage.
What is Slippage Tolerance?
Slippage tolerance is the maximum percentage by which a trade's fill price can differ from the order price. For example, if an investor sets their slippage tolerance at 0.50%, and they place an order to buy bitcoin for $100, their order will be filled only if the final purchase price is within $0.50 of their expected price.
This is helpful in crypto markets because of the high volatility. By using a slippage tolerance, you're telling your broker that you're willing to accept a certain amount of deviation from the expected price in order to get your trade filled.
This is an important setting for all traders because it can help to avoid negative slippage and ensure that your orders are filled at the price.
The Final Word on Crypto’s Trading Slippage
Crypto investors would always want an exact price, whether they're buying or selling. Most investors want that certainty. But given the nature of the volatile nature of crypto assets, this is not always possible.
Also, if you are trading in less established exchanges, you're more likely to face slippage situations.
Given the chaotic movement of crypto prices, no sane investor would think that buying or selling assets like Ethereum or Bitcoin or other crypto is as predictable as trading stocks.
By understanding slippage tolerance control as well as the overall mechanics of price fluctuations, you can adjust your trading strategy so you can benefit from slippages instead of being harmed by them.