Steemit Crypto Academy [Beginners' Level] | Season 4 Week 1 | The Bid-Ask Spread

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Q1:- Properly explain the Bid-Ask Spread.

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Bid is a price at which the market is willing to buy a trade, while as ask is the price at which the market is ready to sell a trade. To put it simply we can say that the price at which a buyer is ready to buy an asset is known as the bid price while the price at which a seller is ready to sell an asset is known as the asking price.

Bid is the maximum price offered by a buyer to buy an asset, while as ask is the minimum price set by the seller to sell an asset.

Mathematically it can be expressed as;

Ask price- Bid price=Bid-Ask Spread.

In the screenshot above, you can see the Ask price of steem is 0.082965 and Bid price of a steem is 0.082644 which means Bid-ask Spread will be 0.000321(Ask-Bid).

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Q2:- Why is the Bid-Ask Spread important in a market?

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Bid-Ask Spread is very important in the market because it helps us to determine the liquidity of the market/asset and determining the trading volume of assets at a certain period.

When the difference between the Ask and Bid price is high, it predicts very low liquidity in the market and therefore the sellers and buyers are limited at this time. And when the Ask and Bid price is low, more will he liquidity and faster will be transactions executed...

Bid-Ask Spread is used by traders to determine the moves of an asset to buy or sell assets. In a large Bid-Ask spread transaction speed will be low therefore the market will be less active while as in a Small Bid-Ask spread transaction speed will be high and the market will be more active.

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Q3:- 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.

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To calculate the above-mentioned terms we will use the following values:-
Bid price= $5
Ask price=$5.20
We have the formula below;

Ask price - Bid price=Bid-Ask Spread

$5.20 - $5=$0.2
Bid-Ask Spread=$0.2

To calculate the percentage we will use the formula;

%Spread = (Spread/Ask Price) x100.
%Spread=(0.2/5.2)x100.
%Spread=3.84%.

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Q4:- 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.

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The values which we are going to use are as follows;
Bid price=8.40
Ask price= $8.80

We will use the formula below:-

Ask price - Bid price=Bid-Ask Spread

$8.80 -$8.40 = 0.4

To calculate the percentage we will use the formula is as follows:

%Spread = (Spread/Ask Price) x 100
%Spread =(0.4/8.80) x 100
%Spread = 4.54%

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Q5:- In one statement, which of the assets above has the higher liquidity and why?

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In the market, higher liquidity will be in Question 3 or crypto X because of the low Bid-Ask spread. we know when the spread is low in the market, higher is the liquidity and therefore transaction speed.

Crypto X has a Bid-Ask Spread of 0.2 while Crypto Y has a Bid-Ask Spread of 0.4, lower the spread greater will be liquidity there it's obvious that crypto X has the higher liquidity.

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Q6:- Explain Slippage.

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As we know the crypto market is highly volatile and their price fluctuations are very high. we place orders at which we are willing to buy or sell assets but due to the high volatility of market prices keep changing very fastly and our orders may not be executed or filled this is what we called as Slippage.

Slippage could be beneficial or harmful for investors, depends upon the way trade goes.

Slippage arises where orders are huge in the market and the volume is not sufficient to maintain the spread in the market this all happens because of the highly volatile market which triggers prices to go up or down very quickly.

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Q7:-Explain Positive Slippage and Negative slippage with price illustrations for each.

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Positive Slippage:-When a slippage or change in price favours the trader it is said to be Positive Slippage. In this type of slippage, the trader’s order gets executed at a higher price than the price set/planned by a trader. Similarly, if a trader has to buy an asset at some price but its price comes down and the trader buys that asset at a low price then sells that at a high price, we can say slippage favours him and he makes more profit then he expected or planned.

I placed an order to buy IOTX/USDT at $20. The order is executed at a price of $19.5 due to price alterations.Here I will get a profit of $20-$19.5=$0.5 with positive slippage. On the other hand when I place an order to sell IOTX/USDT for $20. The order is executed at a price equal to $20.5, here I will get a profit of $0.5 with positive slippage.

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Negative Slippage:-When a slippage or change in price disfavors the trader it is said to be Negative Slippage. In this type of slippage, the trader’s order gets triggered at a lower price and therefore suffers loss. Similarly, if a trader has to buy an asset at some price but its price goes up and the trader buys that asset at a high price and sufferers loss from here also, we say that slippage goes against the trader.

If I placed an order to buy IOTX/USDT at $20,but it executed on a higher price, $20.5 due to price fluctuations. Here I suffer a loss of $0.5 due to negative slippage. On the other hand if I placed an order to sell IOTX/USDT for $20.It may be executed at a price of $19.5,loss will be $0.5 again due to negative slippage.

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Conclusion

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Before going through this lecture of the professor, I had a very basic knowledge about these terms. Now after doing this task, I can say I have developed a very good understanding of each of the terms we discussed in the lecture...Thanks for this wonderful lecture @awesononso.