Slippage in Crypto: What It Means and How It Affects Trading
Updated · May 08, 2022
Cryptocurrency trading is a rapidly growing industry, but it can be difficult to make consistent profits.
One reason for this is something called slippage. In this blog post, you will learn what slippage means and how it affects trading of volatile assets.
We will also discuss some strategies that you can use to reduce or eliminate slippage when trading cryptocurrencies.
What Is Slippage in Crypto?
Slippage means the difference between the expected price of a trade and the actual price at which the trade happens. In other words, slippage is what you lose when the price of the asset in trade rises before your order is executed.
For example, imagine that you want to buy one bitcoin at $11,000 but the actual price ends up being $11,050. If you had placed a buy order at $11,000, you would have experienced a negative slippage of $50. In this case, negative slippage means that you'd end up paying $50 more than desired.
It would be caused by the market moving against you and pushing the price up beyond your buy order.
Slippage can also be caused by other factors such as trading volume and the size of your order. If you place a large buy or sell order, it will take longer to fill, and the price is likely to change.
Factors that Affect Slippage
The factors that affect slippage the most are volatility and liquidity. Each can cause positive or negative slippage.
Volatility is the level of price fluctuations for a particular asset. The more volatile an asset is, the greater the chance of experiencing a significant slippage.
When you trade a highly volatile asset like cryptocurrencies or forex, by definition, you will have a very hard time getting the price you want and may witness slippage in both directions.
That's a particularly pronounced possibility if you try to execute large orders at once because the innate crypto volatility might be augmented by liquidity issues.
Liquidity refers to how quickly and easily an asset can be bought or sold at its current market price without affecting that price too much. The lower the liquidity of an asset, the less likely it is for your order to be fulfilled quickly. As you can imagine, the longer an order takes, the likelier a slippage becomes.
For example, if you want to buy a small amount of litecoin at a large and reputable exchange, the liquidity is high and you are likely to get your order filled quickly at the expected price.
On the other hand, if you want to buy a large quantity of litecoin and the liquidity is low and you may experience significant slippage.
Positive vs Negative Slippage
Slippage can be positive or negative depending on whether the trade moves in your favor or against you.
On one hand, if you had placed a buy order at $11,100 but the actual selling price fell to $11,000, you would have experienced a positive slippage of $100. In this case, you'd be better off by $100 as the market would have moved in your favor, pulling down the price before your buy order is registered on the blockchain.
On the other hand, if you had placed a buy order at $11,000 but the actual selling price rose to $11,050, you would have experienced a negative slippage of $50.
In this case, you'd be worse off by $50 as the market would have moved against you, pushing up the price above your buy order.
How to Calculate Slippage
There are two ways to calculate slippage: in dollars and as a percentage. To find the slippage in dollars, subtract the price you expected to get from the price you actually got.
To find the slippage as a percentage, divide the slippage in dollars by the price you expected to get.
When you're dealing with a trading platform, slippage is usually shown as a percentage.
To figure out the percentage of slippage, divide how much money you lost by the difference between the price you were expecting to get and the worst possible execution price.
Then, multiply that number by 100 to turn it into a percentage.
The worst possible execution price is the limit price you set when entering a limit order. Keep in mind that this calculation only applies if you're using a limit order instead of a market order.
For instance, if you want to buy one bitcoin for $11,000, and you're not willing to pay more than $12,000, you can enter a limit order at $11,000 with a limit price of $12,000. If the price rises to $11,500, your order will execute. Your slippage, in this case, would be -$500.
To convert that amount into a percentage, divide $500 by $1,000 (the difference between the price you expected to get and the worst possible execution price). This gives you a percentage slippage of 50%.
How to Avoid Crypto Slippage
There are ways to minimize your exposure to slippage, but it is important to understand that slippage is an intrinsic part of the crypto market (or any highly volatile asset).
Here are a few actionable steps that will prevent price fluctuations from resulting in undesired trades.
Place Limit Orders
The most secure way to limit slippage is to place limit orders for cryptocurrencies instead of market orders.
When you place limit orders for crypto assets, you can specify a maximum buy and minimum sell price. This ensures that you will only execute your trade if the price falls within your desired range.
This also allows you to avoid getting caught in a bidding war, which can drive prices beyond what you're willing to pay.
Bump the Gas on Your Transaction
Another way to limit slippage is to bump up the gas price on your transactions.
This will ensure that your transaction is processed more quickly, significantly reducing the risk of price fluctuations.
While this method does not guarantee that your trade will execute at the expected price, it helps minimize any potential losses.
The downside of a higher gas price is that you'll pay higher transaction fees. But if the trade is important enough, it might be worth paying more to avoid negative slippage.
Use Exchanges With High Liquidity
One of the best ways to avoid slippage is to use exchanges with high liquidity.
Exchanges with high liquidity have a large number of buyers and sellers, which reduces the risk that your order will not be filled at the expected price. The difference in trade volume between a well-respected, large exchange and an obscure one is massive.
For example, the top-ranked cryptocurrency exchange by volume on CoinMarketCap is Binance. It handles over $750 million in daily trading activity and more than $20 billion worth of assets under management (AUM). By contrast, another popular name, IDEX, has a 24-hour trade volume of only $14 million and an AUM of less than $100 million.
The difference in liquidity is stark, and it's one of the primary reasons why Binance has lower slippage rates.
Some of the largest and most secure exchanges include:
If you're looking to minimize your exposure to slippage, using an exchange with high liquidity is a good idea.
Trade During Active Hours
Another way to reduce the risk of slippage is to trade during active hours.
Cryptocurrencies are a 24/7 asset class, but there are times when the market is more active than others. Trading during periods of high volume can help ensure that your order will be filled at the expected price.
The best time to trade cryptocurrencies is when the trade volume is high. Most reputed crypto exchanges report the current volumes. Observe the patterns of trade over a few days and get a good feeling when people are the most active.
Consider Coins with Quick Processing Times
Altcoins like Solana are designed to process transactions in an instant, practically eliminating the risks associated with price slippage.
Solana is a cryptocurrency that can handle up to 65,000 transactions per second (TPS). This makes it one of the fastest cryptocurrencies in the world. By comparison, Bitcoin can only process about seven TPS and Ethereum 15 TPS.
Other quick altcoin networks include:
Hopefully, by now you have a clear understanding of what is slippage in crypto trading—an inevitable part of the process.
But by using limit orders, setting higher gas prices on transactions, and trading during active hours, you can drastically reduce the risk of slippage for your trades.
Trading during periods of high volume can help ensure that your order will be processed at the expected price.
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