What Is Slippage In Crypto, And How Can You Avoid It?

What is slippage in crypto? Learning the answer can help you build wealth in the cryptocurrency market like never before. In this article, we discuss this important topic in detail and provide tips for minimizing slippage in all your trades.

What Is Slippage In Crypto?

Slippage in crypto on trading app

Exactly what is slippage in crypto? It’s the difference between the price you expect to get on the crypto you’re buying and selling and the price you actually get when the order executes.

Most traders have a specific price in mind at which they want to buy or sell. But, because of how quickly the crypto market moves, the price of the coins can rise or fall between the time your order enters the market and the time the trade is complete.

As a result of those fluctuations, you can end up buying or selling crypto at a higher or lower price than you originally intended.

Slippage actually occurs in all trading markets — such as equities, bonds, currencies, and futures — but it is more frequent and has a bigger impact on the final price in crypto markets.

Depending on the price you were aiming to hit and the direction the market moved relative to that price, slippage falls into three categories:

  • Positive slippage
  • Neutral slippage
  • Negative slippage

Here’s what each one means.

Positive Slippage

Positive slippage is any fluctuation that makes or saves you money in some way.

For buy orders, positive slippage occurs when the actual executed price is lower than the set or expected price of the order. In that case, you pay less than planned for the same amount of crypto.

For sell orders, positive slippage occurs when the actual executed price is higher than the set or expected price of the order. In that case, you make more than planned for the same amount of crypto.

Neutral Slippage

For all intents and purposes, neutral slippage is the absence of slippage. Basically, you hit the bullseye and paid or sold for the expected amount.

Neutral slippage isn’t used often in the crypto trading lexicon, but it’s good to know that the concept exists.

Negative Slippage

Negative slippage is any fluctuation that costs or loses you money in some way.

For buy orders, negative slippage occurs when the actual executed price is higher than the set or expected price of the order. In that case, you pay more than planned for the same amount of crypto.

For sell orders, negative slippage occurs when the actual executed price is lower than the set or expected price of the order. In that case, you make less than planned for the same amount of crypto.

Causes Of Slippage In Crypto

Inside a crypto trading app

Low Liquidity

For trading markets such as forex, NASDAQ, crypto, and others, liquidity refers to the volume of activity that takes place at any one time.

High liquidity means that a large number of trades are happening. Low liquidity means that a small number of trades are happening.

In the crypto market specifically, low liquidity can occur because some cryptocurrencies aren’t traded very often due to their lack of popularity or their newness compared to others.

As a result, the difference (or spread) between the lowest ask and the highest bid can be wide. Such high spreads can cause rapid and dramatic changes in the price before an entered order can be executed.

For example, Seller A enters a market order to sell their cryptocurrency for $1.50 when a buyer expresses interest. Seller A waits three days because of low liquidity in the cryptocurrency for which they’re trading.

After three days, Buyer A appears. The problem is, Buyer A is only willing to pay $0.50 for the cryptocurrency.

Since Seller A entered the trade as a market order, it will be executed at the current market price — whatever that may be. Because there is only one buyer, the market price for that cryptocurrency will drop dramatically from $1.50 to $0.50 in a matter of seconds.

The lack of a buyer (or low liquidity) results in a sudden drop in the market price with only a single transaction.

High Volatility

For all trading markets, volatility is the rate at which the price increases or decreases over a particular period. High volatility means that the price at which a specific order executes is dramatically different from the price at which the order was entered.

For example, Buyer B enters an order to buy when the market reaches $2.00. But because of high volatility — i.e., things are moving so quickly — the order doesn’t execute before the price reaches $2.10.

So, in this case, Buyer B pays $2.10 and experiences negative slippage because the final buy price was higher than they hoped.

The cryptocurrency market is still speculative — meaning it often has a high level of volatility — because it’s relatively new and unproven (compared to other commodities). As a result, a single news event or sudden activity can trigger a dramatic price increase or decrease.

How To Avoid Slippage In Crypto

Crypto trading app

1) Learn How To Calculate Slippage

Real-time slippage formulas are very complex. But if you want to figure out how much slippage you can tolerate before entering a trade, here’s a simple way to do it.

Slippage is expressed in two ways: as a dollar amount and as a percentage. Most trading sites display slippage as a percentage, but to reach that number, you first have to calculate it as a dollar amount.

Slippage Dollar Amount = Price You Got – Price You Expected

If you paid $47,250 on an order for $47,000, your slippage dollar amount is $250 ($47,250 – $47,000 = $250).

Remember that slippage is relative to your original intentions. In this case, even though the number is positive, you experienced negative slippage. It’s negative because you paid a price that was higher than originally intended.

Once you’ve calculated the slippage dollar amount ($250), you can use it to figure the slippage percentage with this formula:

Slippage Percentage = (Slippage Dollar Amount / (|Limit Price – Expected Price|)) x 100

The vertical lines around the limit price and expected price denote absolute value, meaning that we’re concerned with the number itself, regardless of its sign. So, if we come up with a negative number (e.g., -$250), we are only concerned with $250.

This becomes important if your limit price is less than your expected price.

For this example, we’ll use the following information:

  • You set your expected price at $47,000
  • You set your limit price at $47,500 (the highest you wanted to go)
  • The bid executed at $47,250
  • Your slippage dollar amount was $250 (per the previous formula)

Plug those figures into the equation and crunch the numbers.

Slippage Percentage = (Slippage Dollar Amount / (|Limit Price – Expected Price|)) x 100
Slippage Percentage = ($250 / |$47,500 – $47,000|)) x 100
Slippage Percentage = (|$250 / $500|)) x 100
Slippage Percentage = 0.5 x 100
Slippage Percentage = 50%

It’s a good idea to run some numbers before entering a trade so you know what slippage you can handle. It’s also beneficial to know how much actual money you’re set to make or lose based on a displayed slippage percentage.

2) Set Your Slippage Tolerance

Some decentralized exchanges allow you to enter your slippage percentage (or slippage tolerance) for each transaction.

Doing the math first and adjusting the numbers before entering the trade helps ensure that you don’t exceed your budget (e.g., the amount you’re willing to make or lose).

3) Split Large Buys Into Smaller Chunks

Learning about what is slippage in crypto

If you trade large quantities at a time, you may benefit from splitting those buys into smaller chunks in order to minimize slippage. For example, if you buy $100,000 with 1% slippage, you’ll pay an extra $1,000.

But if you buy $50,000 with 1% slippage ($500) and another $50,000 with 0.5% slippage ($250), you’ll get the same amount of cryptocurrency for less slippage than if you buy it all at one time ($750 versus $1,000).

4) Process The Order As Fast As Possible

Because of the volatility of some cryptocurrencies, all it takes is a fraction of a second (micro- and even nanoseconds) for prices to go up or down.

You can minimize these fluctuations by processing the order as quickly as possible through a fast-executing broker.

5) Avoid Trading During Volatile Market Events

As we mentioned earlier, a significant event or announcement can send the cryptocurrency market soaring or plummeting.

When such extreme activities occur, the possibility of incurring slippage increases ten- or even one-hundred-fold. Avoid trading during those volatile market events.

Minimize Slippage And Build Wealth With Vauld

Minimize Slippage And Build Wealth With Vauld

Slippage in crypto will occur — it’s just a factor of today’s marketplace. But you can minimize your losses over the long term and build wealth in the process when you partner with Vauld.

With Vauld, you gain access to an extensive list of cryptocurrencies, a number of ways to earn, and interest rates to back it all up.

Vauld users also experience other perks, including:

Sign up with Vauld today and explore all of the ways we can help you perfect your wealth-building strategies.

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