Steemit Crypto Academy S4/W3| Assignment post on Bid-Ask Spread submitted to Prof. @awesononso

Introduction

Hi great steemians and academy students,
Good to see you all again this new season. As for new students, wishing you all grace to reach advance level soon. Much love from here.

QUESTION 1: Properly explain the Bid-Ask spread?


The term Bid-Ask spread have two words that are conjoined to formulate it which is the Bid price and Ask price.

In a concise definition, the Bid price is simply the price that a purchaser wants to pay for an order (product) which can be either digital order e.g cryptocurrency or physical order e.g cloth. While the Ask price is the minimum price that a seller wants to sell an asset.

Understanding the above, I proceed to explain that the Bid-Ask spread which is otherwise called spread is the price range that falls in between the Bid price and Ask price I.e the difference between Bid price and Ask price.

Example: A purchaser wants to pay for an assert at a Bid price of $100 and but the asset owner wants to sale it at a Ask price of $105.

The difference between the purchaser’s and seller’s price is $5. Hence, the difference ($5) is the Bid-Ask spread.

The Bid-Ask spread has a formula for calculating it. which is;
Bid-Ask spread = Ask price - Bid price

And

%spread = (Spread/Ask price) x 100
Is for calculating it price in percentage

QUESTION 2: Why is the Bid-Ask spread important in a market?


For a trader to trade with caution, the person have to use spread in order to guide against illiquidity or be aware of it if the trader still have intentions on the order.

For proper circulation of an asset to be achieve, there must be an equilibrium between purchasers (demand) and sellers(suppliers). This occurrence is what makes an asset to be term as liquidity When a market is regard as liquid, it have many buyers and seller engaging in it and as such, it trading volume increases. Viewed in a chart, the size of the spread is small.

For an illiquidity, the size of spread increases as the it gets worst. Here, the number of purchasers and sellers are few and such, there is a very low trading volume.

From the above, it is deduced that Bid-Ask spread plays a vital role in displaying the state value an asset over a period of time.

Source
The green arrow indicates high trading volume that is liquidity while the red circle indicates low trading volume.
Implementing the use of this spreads when trading is very essential.

QUESTION 3: If crypto X has a Bid price of $5 and an Ask price of $5.2,
a. Calculate the Bid-Ask spread
b. Calculate the Bid-Ask spread in percentage

Solving

a. calculate the Bid-Ask spread
Formula: Bid-Ask spread = Ask price - Bid price
Bid-Ask spread = $5.20 - $5 = $0.2
Therefore, the spread is $0.2

b. Calculate the Bid-Ask spread in percentage
Formula: %spread = (spread/Ask price) x 100
Therefore: %spread = ($0.2/$5.20) x 100
%spread = 3.85%

QUESTION 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

Solving

a. Calculate the Bid-Ask spread
Formula: Bid-Ask spread = Ask price - Bid price
Therefore: Bid-Ask spread = $8.80 - $8.40
Bid-Ask spread = $0.4


b. Calculate the Bid-Ask spread in percentage
Formula: %spread = (spread/Ask price) x 100
%spread = ($0.4/$8.80) x 100
%spread = 4.54%

QUESTION 5: Which of the assert above has the highest liquidity and why?


From the above two solved problems, crypto X spread is $0.2 and the crypto Y spread is $0.4. The size of crypto Y spread is bigger than that of crypto X.

Aforesaid, a big spread is an illiquid spread. Hence, crypto Y is bigger than crypto x. As such, crypto x have a high trade volume compared with crypto Y and hence, a higher liquidity.

QUESTION 7: Explain positive slippage and Negative slippage with the price illustration for each


POSITIVE SLIPPAGE: This a slippage occurrence that yields profit to either the purchaser or seller of a cryptocurrency due to fluctuations.

For an illustration, as a purchaser (buy order), I want to purchase a digital currency for $100 but due to slippage, it was executed at $99. I have a positive slippage of $1 as the price becomes cheaper than the initial.

As a seller(seller order), I want to sale my coin at a price of $90 but due to volatility of coin, there is a slippage and the value increases to $93, I make a profit of $3.


NEGATIVE SLIPPAGE: This slippage is the opposite of positive slippage. In this slippage, purchaser and seller tends to loose profit it fluctuations.

For an illustration in sale order, I want to sale my coin at th me rate of $100 but due to sudden slippage, the price fluctuate to $98. Hence, giving me a loss of $2.
In purchase (buy) order, I want to buy a coin for $90 but due to sudden fluctuation, the price becomes $91, I encounter a loss of $1

Conclusion

It is essential for a trader o be aware of Bid-Ask spread an asset (crypto) as exposure to liquidity is of greater advantages in trading coin easily.
Delay in order doesn’t guarantee a positive slippage as well and it is unavoidable since coins are volatile in value.
Thank you Prof. @awesononso for lecturing us this interesting topic.