CRYPTO ACADEMY | SEASON 4 WEEK 1| HOMEWORK POST FOR PROFESSOR @awesononso

Properly explain the Bid-Ask Spread.

Lets assume you enter a market to buy a bag of rice you have in your mind the maximum price you are willing to pay for the bag of rice meanwhile the seller also has his minimum price at which he is willing to sell his bag of rice.
Its same in the crypto market, but in the crypto market we come across terms like Bid price and Ask price. They are explained below.
BID PRICE this is the maximum price a buyer is offering to buy an asset at. Mostly used in football business as well as we often hear that a team has prepared a bid of certain amount for a certain player. It means that is the highest amount they want to buy the player at.

ASK PRICE this on the other hand is the minimum price a seller is offering to let his asset go at. It means the seller will not accept anything below that pice.
Now to the Bid-Ask Spread, this is obtained from the first two terminologies explained above. The difference between the Bid price and the Ask price is termed the Bid-Ask Spread.

So the Bid-Ask Spread is defined as the mathematical difference of Bid price and the Ask price.
Mathematically its given as;
Bid-Ask Spread = Ask price - Bid price

As seen from the screenshot, the ask price of steem is 0.080787 and the Bid price is 0.079800
So the Bid-Ask Spread of steem= 0.080787 – 0.79800
Bid-Ask Spread = 0.000987

Why is the Bid-Ask Spread important in a market?

Bid-Ask Spread Is a very important tool in crypto trading because of its ability to determine the liquidity of a given asset, that how swiftly an asset can be traded, it is very safer to trade with assets with higher liquidity because its has finer prices that is to the advantage of the investor. The higher the spread the lower the liquidity and the smaller the spread the higher the liquidity. The extent of widening or narrowing of a spread also gives information on the doirection a market is moving in.

Another important impact of the Bid-Ask Spread is that it help investors to know which order to place either a market order which normally fills at the best offer or a limit order which sets its price limit where the order should be filled.

If Crypto X has a bid price of $5 and an ask price of $5.20,
a.) Calculate the Bid-Ask spread.
b.) Calculate the Bid-Ask spread in percentage.

a) Ask Price =$5.20
Bid Price = $5
Bid-Ask Spread = Ask price – Bid price
=Bid-Ask Spread = $5.20 - $5
= Bid-Ask spread of X = $0.20

b) Percentage spread (%spread) = (spread divided by ask price) multiplied by 100
= % spread = (0.20/5.2) *100
=% spread = 0.385 *100
=%spread = 3.85%

If Crypto Y has a bid price of $8.40 and an ask price of $8.80,
a.) Calculate the Bid-Ask spread.
b.) Calculate the Bid-Ask spread in percentage.

a) Ask Price =$8.80
Bid Price = $8.40
Bid-Ask Spread = Ask price – Bid price
=Bid-Ask Spread = $8.80 - $8.40
= Bid-Ask spread of Y = $0.40

c) Percentage spread (%spread) = (spread divided by ask price) multiplied by 100
= % spread = (0.40/8.80) *100
=% spread = 0.0455 *100
=%spread = 4.55%

In one statement, which of the assets above has the higher liquidity and why?

Crypto X has a higher liquidity because crypto X has a Bid-Ask Spread of 0.2 whilst Crypto Y has a Bid-Ask Spread of 0.4 and the lower the spread the higher the liquidity. from this knowledge Crypto x has the higher liquidity.

Explain Slippage.

Crypto currencies are known to be very volatile. This feature makes it possible for the prices of crypto assets to fluctuate within a seconds that’s the price of an asset can change significantly within a second. People sometimes place orders called markets orders which means that he or she is willing to sell at the current market price. Between the time of placing a market order and the time it is filled due to the volatility of crypto currencies there could be a change in price, so if the order is filled at price different from the price it was set at we say a slippage has occurred. Slippage can favour the investor or it may disfavor the trader depending on the direction of the change in price.

Explain Positive Slippage and Negative slippage with price illustrations for each.

POSITIVE SLIPPAGE
This Is a situation where an order is executed at a price that is different from the price at which the order was placed but the change in price favours the investor. This can happen to either a selling order or a buying order.

Lets assume I place a market order to buy crypto A at $234.27 but after the order was filled I realized the order was filled at $232.97 which means that I bought the asset $1.3 cheaper than my initial bid. In this case we say there was a positive slippage because it was to my advantage.

Lets again assume that I place a market order to sell crypto B at $112.70 but after the order was filled I realized that the order was filled at $115.70 which means that it was sold $3 more than my initial ask price. In this case a positive slippage occurred.

NEGATIVE SLIPPAGE
In trading when a market order is executed at a price that is different from the price at which the order was opened but it goes to the disadvantage of the investor it is called a negative slippage.

If a trader opens a market order to purchase a certain asset at a price of $ 47.00 but after the order was filled he noticed that the order was filled at a price of $48.00, this means that he bought the asset $1 more than what he initially bided for. In this case we say a negative slippage has occurred.

If a trader places a market order to sell an asset at a price of $23.00 but after the order was executed he realizes the order was filled at a price of $ 22.00 which means that the asset was sold $1 lesser than he anticipated. This means that a negative slippage has occurred.

CONCLUSION
This lecture has been very impactful, knowing the implication of a bid-ask spread in a market can guide us as to what order to place and also to know the liquidity of an asset. I thank professor @awesononso for this wonderful lesson.