Steemit Crypto Academy | The Bid-Ask Spread | Homework task for @awesononso
Hello All Steemians !!!
On this occasion, I will try to take a class at Steemit Crypto Academy. I am interested in joining this class because there are many new lessons that I will get here. I will do homework task from professor @awesononso. Lesson discussion about The Bid-Ask Spread. Lets try...
Explain the Bid-Ask Spread
Bid-Ask Spread are two interrelated components and form a concept that is used by many people in trading assets or cryptocurrencies. These components are the bid spread and the ask spread. The bid price is the highest price a buyer is willing and able to buy for an asset or cryptocurrency. The ask price is the lowest price a seller is willing and able to sell for an asset or cryptocurrency.
Bid-Ask Spread is the difference between the Bid and Ask prices of an asset or crytocurrency. Mathematically, the equation can be made: Bid-Ask Spread = Ask price - Bid price. In this case, a price agreement is needed between the seller and the buyer. Both must be mutually willing on the agreed price in the transaction process within a certain period of time.
Why is the Bid-Ask Spread Important in a Market?
Bid-Ask Spread is an important factor that traders observe and analyze in the market. It will show and determine the liquidity in the market within a certain period of time. An important component in terms of trading and very influential is the supply-demand balance in the market. The supply of an asset or cryptocurrency indicates the amount available for sale in the market at a certain time. The demand for an asset or cryptocurrencies indicates the amount of willingness of buyers in the market at a certain time. If this balance is reached, the market has liquidity to the asset or cryptocurrency.
Liquidity shows how easily and quickly an asset or cryptocurrency can be traded. A liquid market exhibits high trading volume and many transactions executed by both buyers and sellers. Here the bid and ask prices show a low and close difference. It can be concluded that in a liquid market, the bid-ask spread will be small. Conversely, if the bid-ask spread is large, then the trading volume is low and transactions executed by buyers and sellers are few. It can be concluded that the market is illiquid.
If Crypto X has a Bid Price of $5 and an Ask Price of $5.20
a.) Calculate the Bid-Ask Spread
- Bid-Ask Spread = Ask Price - Bid Price
- Bid-Ask Spread = $5.20 - $5
- Bid-Ask Spread = $0.2
b.) Calculate the Bid-Ask Spread in Percentage
- %Spread = (Spread/Ask Price) x 100
- %Spread = ($0.2/$5.20) x 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
- Bid-Ask Spread = Ask Price - Bid Price
- Bid-Ask Spread = $8.80 - $8.40
- Bid-Ask Spread = $0.4
b.) Calculate the Bid-Ask Spread in Percentage.
- %Spread = (Spread/Ask Price) x 100
- %Spread = ($0.4/$8.80) x 100
- %Spread = 4.54%
Which of the Assets Above has the Higher Liquidity and Why?
Based on the results of the calculations above, the data shows the crypto spread X = $0.2 and the crypto spread Y = $0.4. Here the spread of crypto X is smaller than crypto Y. This means that crypto X shows higher liquidity. This is evidenced by the bid price and ask price having a small and close difference. In this case the trading volume is high and a lot of transaction processes take place between buyers and sellers in the market.
Explain Slippage
In the world of cryptocurrencies, price changes and volatility are unavoidable for traders and often occur over a period of time. Slippage can happen at any time. Even in the type of market order which means the trader places a trade at the current price, Slippage can also occur when there is little time between when the order is placed and when it is executed. This indicates that there is a difference between the trader's expected price and the executed price.
Slippage often occurs in cryptocurrency markets that have large Bid-Ask Spreads. This indicates that trading volume is low and the market has low liquidity. This makes the order not meet the trader's expectations. Slippage is a situation that traders cannot avoid in trading because cryptocurrency price changes are unpredictable and volatile over time.
Explain Positive Slippage and Negative slippage with Price Illustrations for Each
Positive Slippage
Positive slippage is a situation when orders are placed and executed differently and lead to profit for trader. Positive slippage can occur in the buying and selling process. In a buy order, this occurs when the order is executed at a lower price than the intended price. In a sell order, this occurs when the order is executed at a price higher than the intended price.
The illustration is when I place an order to buy SBD/BTC at $8. The existence of price volatility in the market makes the execution of this trade at $7.8. Here I get profit with positive slippage is $8-$7.8=$0.2. On the other hand when I place an order to sell SBD/BTC for $10. The existence of price volatility in the market makes the execution of this trade at $10.3. Here I get profit with positive slippage is $10.3-$10=$0.3.
Negative Slippage
Negative slippage is a situation when orders are placed and executed differently and lead to a loss for trader. Negative slippage can occur in the buying and selling process. In a buy order, this occurs when the order is executed at a higher price than the intended price. In a sell order, this occurs when the order is executed at a price lower than the intended price.
The illustration is when I place an order to buy SBD/BTC at $8. The existence of price volatility in the market makes the execution of this trade at $8.2. Here I have a loss with negative slippage is $8.2-$8=$0.2. On the other hand when I place an order to sell SBD/BTC for $10. The existence of price volatility in the market makes the execution of this trade at $9.7. Here I have a loss with negative slippage is $10-$9.7=$0.3.
Conclusion
Bid-Ask spread is an important component and plays a role in trading any asset or cryptocurrency. Smart traders will definitely observe and analyze this to find out the market situation that shows liquidity and balance of supply and demand. This can provide information that simplifies and speeds up the transaction process to be carried out. Slippage will also definitely occur on every buy and sell order of an asset and cryptocurrency. This is an unavoidable and unpredictable situation for traders due to price volatility. Slippage can be profitable and detrimental to traders so analysis and consideration of various factors is needed.
Hello @kavinsky7,
Thank you for taking interest in this class. Your grades are as follows:
Feedback and Suggestions
You did very well on the topic. A great arrengement with clear explanations. Good job!
You just missed a small point on why the spread is important.
Also, always follow instructions carefully.
Thanks again as we anticipate your participation in the next class.