Steemit Crypto Academy [Beginners' Level] | Season 4 Week 1 | The Bid-Ask Spread
Hello everyone!
Properly explain the Bid-Ask Spread.
To start with, every potential business person before going on to perform a business in a market, he/she will first anticipate some price that will be in favor to him/her such that he will not encounter any lost.
For instance, in our football perspective, if a club is preparing to land a player to their team, firstly they will prepare their bid to that club and there the respective club will tell them the price they will sell the player to them.
From this scenario, I will like to explain the concept individually thus Bid price and Ask price. Bid price can be defined as the maximum price a potential buyer is willing to pay for a crypto asset. Ask price is the minimum price a willing seller is offering to sell a crypto asset.
From the individual explanation, Bid-Ask price also known as The Spread refers to the difference between the Bid Price and the Ask Price. However it can be calculated using the mathematical equation ≈ Bid-Ask Spread = Ask Price – Bid Price.
Why is the Bid-Ask Spread important in a market?
Bid-Ask Spread is an important component in the crypto trading market based on its function as it enables us to determine the liquidity of crypto asset which makes investors to know when and where to invest.
In every market, the interplay of demand and supply enables to determine the price of a commodity and also gives information on how a given asset in needed at that period which enables people to trade it. So the liquidity gives the information on how an asset can easily be traded, based on this fact, it is secure or safe to trade with assets which has higher liquidity because such assets prices are very good for a potential investor in the market.
This however be understood as the higher the margin of the spread the lower the liquidity and the smaller the spread margin higher the liquidity. Therefore it can be stated that, the Bid-Ask Spread enables to determine the liquidity of an asset.
Also, in respect to the trading volume of an asset in market, this can further be describe as a minimum spread in the market of an asset signifies that the trading volume of such asset is high hence it is a liquid market. On the other hand, a maximum spread in the market of an asset signifies that the trading volume of such asset is low hence it is illiquid. Therefore, we can conclude that, the Bid-Ask Spread enables to determine market volume of an asset.
If Crypto X has a bid price of $5 and an ask price of $5.20.
a.) Calculate the Bid-Ask spread.
Bid price of X = $5
Ask price of X = $5.20
Bid-Ask Spread = Ask Price – Bid Price
Bid-Ask Spread of X = $5.20 – $5 = $0.20
Bid-Ask Spread of X = $0.20
b.) Calculate the Bid-Ask spread in percentage.
%Bid-Ask Spread = (Spread/Ask Price) ×100
%Bid-Ask Spread = (0.2/5.20) × 100
%Bid-Ask Spread = (0.03846) × 100
%Bid-Ask Spread = 3.846 ≈ 3.65%
If Crypto Y has a bid price of $8.40 and an ask price of $8.80,
a.) Calculate the Bid-Ask spread.
Bid price of Y = $8.40
Ask price of Y = $8.80
Bid-Ask Spread = Ask Price – Bid Price
Bid-Ask Spread of Y = $8.80 – $8.40 = $0.40
Bid-Ask Spread of Y = $0.40
b.) Calculate the Bid-Ask spread in percentage.
%Bid-Ask Spread = (Spread/Ask Price) ×100
%Bid-Ask Spread = (0.40/8.80) × 100
%Bid-Ask Spread = (0.0455) × 100
%Bid-Ask Spread = 4.550 ≈ 4.55%
In one statement, which of the assets above has the higher liquidity and why?
It is observed that the lower the spread the higher the liquidity and the higher the spread the lower the liquidity, therefore crypto X has a higher liquidity with Bid-Ask Spread of 0.20.
Explain Slippage.
In the crypto market, price is not stable and therefore it keep on fluctuating in every second’s period. Prices rise and fall at every seconds due to the volatility of the market. There are significant changes in asset prices in the market at every point in time, this can be a rise or fall of the asset prices.
At some instances, users sometimes place orders on assets based on the current market price that they will be willing to perform the transaction. And within that limited period, the time the order is placed and when it is filled, the volatile nature of the crypto market, there could be a change in price other than price ordered and this could be a positive change or negative change.
So when such event happened, we say slippage has occurred. Based on the change, a positive change will benefit the investor and a negative change will disfavor him/her.
Explain Positive Slippage and Negative slippage with price illustrations for each.
POSITIVE SLIPPAGE
This refers to a situation in which an order is executed at a price which is different from the price at which the order was initial placed but the change that has occurred is in the benefit of the investor, and this can occur either in a selling order or in a buying order.
For example, if I placed a buy order on crypto A at $100 and due to fluctuations in the market, the price of crypto A was filled at $99.2. It means I bought the crypto A at $0.8 less than the initial bid offer hence it is positive slippage.
Again, if I offer a sell order on crypto B at $100 and due to fluctuations in the market, the price of crypto B was filled at $101. It means I sold my crypto B at $1 higher than the initial offer hence it is a positive slippage.
NEGATIVE SLIPPAGE
This refers to a situation in which an order is executed at a price which is different from the price at which the order was initial placed but the change is not in the favor of the investor.
For instance, if I placed a buy order on crypto X at $50 and due to fluctuations in the market, the price of crypto X was filled at $51.2. This implies that I bought the crypto A at $1.2 higher than the initial bid, hence it is a negative slippage.
Again, if I offer a sell order on crypto Y at $20 and due the market fluctuations, the price of crypto Y was filled at $19.2. This implies that, I sold crypto Y at $0.8 less than the initial price bid, hence it is a negative slippage.
CONCLUSION
The concept of Bid-Ask spread is a very important tool for us to know in the crypto market. It has a lot of educative impact on our knowledge, henceforth it enables us to know when an asset is to be traded based on the knowledge from asset liquidity. I really appreciate the lecture and I gave much regards to Professor awesononso for massive and a wonderful lecture.
Hello @salim15,
Thank you for taking interest in this class. Your grades are as follows:
Feedback and Suggestions
You have a good understanding of the topic but the expression needs to be improved.
More details would have improved the presentation.
Thanks again as we anticipate your participation in the next class.
Thank You sir for reviewing my work, I will therefore make an improvement in the subsequent tasks