Slippage is when the price between the markets and computer prices are different when making a crypto transaction.
This leads to an unpredictable result in your transaction that is different from the price when you set your order.
Whether slippage is positive or negative depends on which way the price moves after you make your order.
Slippage is a common occurrence in cryptocurrency, even with the most valued coins such as Bitcoin and Ether.
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What Causes Slippage in Crypto?
Slippage is the result of high demand and volatility, and unstable assets. Market-changing events can cause it.
This could come in the form of halving or hard forks. It could also occur after important news, such as an improvement made to a cryptocurrency system or ban on the cryptocurrency, adoption by large companies, or other notable endorsements.
Negative slippage would be when Elon Musk announced that his company, Tesla, was no longer accepting Bitcoin as payment for his vehicles because of mining and environmental concerns.
This caused the price of Bitcoin to suddenly and rapidly drop in price.
A positive example would be when Loopring hit all-time high afterword rumors broke out about the coin’s involvement in a new NFT marketplace.
The crypto market is unpredictable, so slippage is a common occurrence among investors and traders.
Slippage In The Crypto Market
Slippage is usually the result of a sudden change in the bid/ask spread. Since the process works both ways, slippage occurs both during long and short trades.
Exchanges use computerized programs to measure the bid/ask spread, which are updated by the microsecond. This leaves a narrow window of time where slippage can be caused.
A change in the bid/ask spread can lead to negative slippage when the ask increases in a long trade or the bid decreases in a short trade.
An example of slippage in crypto in the crypto market would be if you made an order to buy 10 Cardano for $2.
Cardano is volatile when you make the order, and the price of Cardano increases to $2.50 before the transaction goes through.
The increased price of Cardano means that your order would cost $25 for 10 Cardano instead of the $20 you would have anticipated.
It’s unlikely the slippage would actually be this high in an order. Slippage usually happens in small increments, such as .01-.2% of the coin’s current value.
Slippage through the order book as the price continues to get higher resulted in a more expensive transaction. This is an example of negative slippage.
Slippage can also be positive when the value of your transaction is worth more than the set order, and negative slippage is when it is worth less.
Slippage Due to Order Size
What is slippage in crypto due to order size?
Slippage can also happen as a result of order size.
An example of this would be if you made a transaction to buy 1 Bitcoin on Coinbase for $60 K, but the first order that filled is less than your transaction amount.
On the first order, you may buy. 1 Bitcoin, and on the next, you get .2, and so on until your order fills.
Slippage caused by order size is generally the result of making a large order, but price volatility still plays a role in how much slippage occurs and how far your order slips through the order book.
Orders will occur at the next best price to the transaction you’ve set, so even in a volatile market, slippage tends to be small.
Mitigating Slippage in Crypto
What is slippage in crypto in terms of mitigation? Slippage is still a factor to watch out for, especially for new investors or investors making numerous large transactions.
There is no way to eliminate slippage when making orders.
Most crypto exchanges offer a tolerance level in the market order rules to ensure you don’t make or lose too much on your investment.
Research your brokerage and learn about their rules on slippage tolerance.
Exchanges will allow a tolerance level where they will cover the loss over a certain percent. This tolerance level is generally .1% of the investment made.
You may be able to get a better deal with your broker’s slippage tolerance, so talking to them about this before investing is a smart move.
There is still no fixed amount with slippage because its rate relies on market volatility and order book flow.
Slippage can occur in different ways, whether using market or limit orders.
Market orders have the best chance of minimizing slippage when trades are executed during hours with less volume.
Market open and closing times, daily, weekly, and monthly, are the most likely times to see higher slippage and market volatility.
Trade outside of these times and keep a close eye on the market and the order book. Exposure to slippage is lowest when trading during hours with high market activity and low volatility.
A low volatility market means that the price does not change quickly. High volatility markets may have more traders with open orders.
Using a limit order can be less predictable because the market may become more volatile while you are not analyzing it.
Traders may avoid or be more watchful of limit orders to minimize the chance of slippage.
Understanding Crypto Slippage
What is slippage in crypto in terms of your investments?
Slippage is a factor worth understanding for every crypto investor.
New crypto users need to understand slippage before investing to avoid panic if you buy crypto at a certain level, but it opens at another level.
Understand that crypto slippage is a factor that everyone in the cryptocurrency market will learn to deal with.
Cryptocurrency is still a relevantly new asset, utilizing decentralized blockchain technology, making it hard to predict.
It is not surprising that high risk and demand lead to market volatility, whether positive or negative.
Understanding how to mitigate the core risks of slippage will improve your investment and make you a better strategist in the crypto market.