Steemit Crypto Academy | Season 4 Week 1 | Assignment Post for Professor @awesononso | The Bid-Ask Spread

Hi everyone! It is a privilege to be part of another season in the steemit crypto academy. This is my homework post for professor @awesononso on the topic: The Bid-Ask Spread

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1. Properly explain the Bid-Ask Spread.

The Bid-ask spread is the difference between the selling and buying price of a particular asset. It is not limited to the crypto space but the stock market as well. It is derived from three words which include Bid, Ask and Spread.

• Bid: This is the demand price, the price placed by a buyer to acquire the crypto asset. For example, a buyer can bid for a crypto asset X at a price of $50 irrespective of the market price.


• Ask: This is the supply price, the price placed by a seller to sell his crypto asset. For example, a seller can ask to sell a crypto asset X at a price of $65 irrespective of the market price.


• Spread: This is an area showing the difference between the Bid and Ask prices. For example, the spread for a crypto asset with a Bid price of $50 and $65 Ask price is $10.

The Bid-Ask Spread is calculated using the formula:

Bid-Ask Spread = Ask Price - Bid Price

This is an example of a typical bid-ask spread chart. The market bid is price $0.0849 and the ask price is $0.0851. The spread percentage is 0.23%.

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

The Bid-ask spread helps know the demand to supply ratio as this will determine the market liquidity of a crypto asset. It provide the demand-supply information in the market and help traders make decisions such as whether to participate in trading the crypto asset. It helps the trader determine the right time to to place an order.

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3. 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.

• BID-ASK SPREAD CALCULATION
  Nb: Ask Price = $5.20 || Bid Price = $5.00
  Bid-Ask Spread = Ask Price - Bid Price
  Bid-Ask Spread = $5.20 - $5.00
  Bid-Ask Spread = $0.2
  
  Hence the bid-ask spread for crypto X (with bid price $5 and ask price $5.20) is $0.2.



• BID-ASK SPREAD PERCENTAGE %Spread = (Spread / Ask Price) * 100
  %Spread = ($0.20 / $5.20) x 100
  %Spread = 0.0384 x 100
  %Spread = 3.85%
  
  Hence the bid-ask spread in percentage for crypto X (with bid price $5 and ask price $5.20) is 3.85%.

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4. 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.

• BID-ASK SPREAD CALCULATION
  Nb: 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 = $0.4
  
  Hence the bid-ask spread for crypto X (with bid price $8.40 and ask price $8.80) is $0.4.



• BID-ASK SPREAD PERCENTAGE
  %Spread = (Spread / Ask Price) * 100
  %Spread = ($0.40 / $8.80) x 100
  %Spread = 0.04545 x 100
  %Spread =4.55%
  
  Hence the bid-ask spread in percentage for crypto X (with bid price $5 and ask price $5.20) is 3.85%.

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

Crypto X has a higher liquidity compared to crypto Y.

Crypto X has a bid-ask spread of $0.2 which is relatively lower compared to the bid-spread of Crypto Y which is $0.4. Hence, Crypto X has more buyers and sellers in its market, this signifies high liquidity.

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6. Explain Slippage.

Slippage is the difference between the placed price of a crypto during a trade and the price at which it was executed.

It occurs usually during periods of higher volatility of the crypto asset. The rise or fall of crypto asset price can occur within second, hence before a successful placing of an order, the change in price causes a slippage.

A typical illustration is a trader trading a TRX/ USDT pair. The trader intends buying TRX at 0.8 usdt, he places the buy order but as a result of low trading volume as at the time this trade was being placed, the transaction took much longer than expected. The price of Trx has increased to 1.1 usdt and the trade was executed at this price. This is a simple illustration of how slippage happen.

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

As stated earlier, Slippage is the difference between the price at which an order is placed from the price it was executed. There are two types of Slippage, it could either be positive or negative.

POSITIVE SLIPPAGE
A positive slippage occurs when the trader is favored by the trade execution.

Buy Order Illustration: In a buy order, there is positive slippage when the bid price is higher the executed price. For example, a trader wants to buy a crypto X at $10. But due to the low trading volume, the trade was executed much later when the price reached a price of $9.4. The positive slippage for this buy order is $0.6

Sell Order Illustration: In a sell order, there is a positive slippage when the ask price is lesser than the executed price. For instance, a trader wants to trade a crypto Y at $6. Due to low trading volume and price volatility, the trade order was executed at $7.5. The Positive slippage for this sell order is $1.5

NEGATIVE SLIPPAGE
A negative slippage occurs when the trade execution is not in the favour of the trader.

Buy Order Illustration: In a buy order, there is negative slippage when the bid price is lower the executed price. For example, a trader wants to buy a crypto X at $15. But due to the low trading volume, the trade was executed much later when the price reached a price of $15.5. The negative slippage for this buy order is $0.5

Sell Order Illustration: In a sell order, there is a negative slippage when the ask price is higher than the executed price. For instance, a trader wants to trade a crypto Y at $15. Due to low trading volume and price volatility, the trade order was executed at $14. The negative slippage for this sell order is $1.5

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Conclusion

The Bid-Ask spread help tell the traders very important information about a crypto trading pair. It can help a trader make trading decision as to if to get involved in a crypto market or when to place orders. Slippage is a common concept in the trading market. It occurs as a result of low market involvement or volatility. Understanding these concepts will help traders make good trading decisions.

Thank you!