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

Hello Guys! It's great to be back this new season. Here's my Homework Post.

Bid Price refers to the highest possible price at which a trader is willing to buy or purchase a crypto asset. Usually, the Bid Price of a Crypto Asset depends on its value and price at the said time. If the value and price of the Crypto Asset are high, the Bid Price is also high and vice versa.

Ask Price refers to the least possible price at which a trader is willing to sell a Crypto Asset. Like the Bid Price, the Ask Price also depends on the Market Value and price of the Crypto Asset. If the price of the Crypto Asset is low, the Ask Price is also low and vice versa.

This brings us to the Bid-Ask Spread. The Bid-Ask Spread simply refers to the difference between the Bid Price and Ask Price respectively. Mathematically,

Bid-Ask Spread = Ask Price - Bid Price

The Bid-Ask Spread, commonly known as 'The Spread', is usually represented pictorially in a graph form, where the Bid Side of the Graph is Green and the Ask side of the Graph is Red. The Bid-Ask Spread is usually the tiny or large space that lies between the Ask and Bid. All this can be seen in the screenshot below.

The Bid-Ask Spread varies for every Crypto Asset, every Crypto Asset has its unique spread. With Steem, the Bid Price is currently hovering around $0.081558 and the Ask Price is currently around $0.082166.

It can be said that the Bid-Ask Spread of Steem
Bid-Ask Spread of Steem = $0.082166 - $0.081558
= $0.000608

With the Spread at $0.000608, the Percentage Spread can be calculated at,
%Spread = (Spread / Ask Price) x 100
= ( $0.000608 / $0.082166)
= 0.803%

From the screenshot below, it can be seen that indeed the Percentage Spread is 0.803%

The Bid-Ask Spread is a very important part of the market that helps traders quite a lot when trading. It is very important to have a technical understanding of the Bid-Ask Spread because it helps to determine the liquidity of any given Crypto Asset.

Liquidity can be described as how easy it is for a Crypto Asset to be converted to other Crypto Assets with it taking a toll on its value. In summary, Liquidity implies the degree of ease to which an asset can be bought or sold on the Crypto Market. The availability of buyers and sellers is what determines how liquid an asset is.

A liquid market has a lot of buyers or sellers with a wide range of offers that a trader can choose to suit his/her preference. A perfect example of a crypto asset with a liquid market is Bitcoin. Bitcoin is known to be the most liquid Crypto Asset of all time because there is a readily active number of traders with different rates to trade the asset. Unlike an illiquid market where traders are a limited few.

In summary, the Bid-Ask Spread is important because it helps traders to know which asset is would be a good trade by letting them know whether the asset has active traders in its market. Traders would know whether it is a good trade, depending on the Spread of the asset; because, The larger the Spread, the more illiquid the Asset is and The smaller the spread, the more liquid the market is.

From the question,
Bid Price of Crypto X= $5.00
Ask Price of Crypto X= $5.20

a.) From the formula,

Bid-Ask Spread = Ask Price - Bid Price
Bid-Ask Spread = $5.20 - $5.00
Bid-Ask Spread = $0.20

Hence, the Bid-Ask Spread of Crypto X is $0.20.

b.) From the formula,
Percentage Spread = (Spread / Ask Price) x 100
Percentage Spread = ( $0.20 / $5.20) x 100
Percentage Spread = 0.0385 x 100
Percentage Spread = 3.85%

It implies that the Percentage Spread of Crypto X is 3.85%

From the question,
Bid Price of Crypto Y = $8.40
Ask Price of Crypto Y = $8.80

a.) From the formula,

Bid-Ask Spread = Ask Price - Bid Price
Bid-Ask Spread = $8.80 - $8.40
Bid-Ask Spread = $0.40

Hence, the Bid-Ask Spread of Crypto Y is $0.40.

b.) From the formula,
Percentage Spread = (Spread / Ask Price) x 100
Percentage Spread = ( $0.40 / $8.80) x 100
Percentage Spread = 0.0455 x 100
Percentage Spread = 4.55%

It implies that the Percentage Spread of Crypto Y is 4.55%

Crypto X has the Higher liquidity, this is because, Crypto X has a Bid-Ask Spread of $0.20 as compared to Crypto Y that has a relatively larger Spread of $0.40 and since a smaller Spread denotes higher liquidity, it is safe to say that Crypto X has higher liquidity than Crypto Y.

Slippage refers to the difference between the expected trade price and the actual trade price it was executed at. It occurs when during a Market Order trade, the price of an asset changes whilst or at the moment the trade is being executed. The Market Order is a type of order that automatically sets the Bid Price or Ask Price to the immediate respective value of the Asset. Due to the volatile nature of Crypto Assets, their prices fluctuate constantly. Prices of Crypto-assets do not remain the same throughout the day. A Crypto Asset can have a price of $1 at beginning of the day, rise to $2 and by the close of the day, it could end at $0.8. These daily price fluctuations are what causes Cryptocurrencies to be volatile and makes Slippage occur.
For instance, assuming you want to buy 25 Steem for 20 SBD at a rate of 0.8, but the moment you made the purchase, the price shot up to up to 8.2, the new buying price changes from 20 SBD to 20.5 SBD.

The slippage here is 0.5 SBD. The impact a slippage could have on a trade could be a good or a bad one. This brings us to the types of Spillage.

Negative Slippage can occur in both Buy Orders and Sell Orders. In the Buy Order, it refers to when the expected trade price for the Buy Order is made but the actual price at which the trade was executed rises higher than the expected trade price and because it is a market order, it automatically adjusts and executes the order, making the trade a slightly unprofitable one. This buys the asset at a more expensive price than the expected trade price.

For the Sell Order, it occurs when the expected trade price for the sell order is made and the actual price at which the trade was executed reduces lower than the expected. This sells your assets at a lower and cheaper price than expected. It is called Negative because it is only losses that are made when it occurs.

Example:

Assuming you make a Buy Order to purchase $50 worth of Crypto X tokens at a market price rate of $5.00. But immediately after the order was placed, the price of Crypto X shot up to $5.50. This would be a negative slippage because instead of the normal 10 Tokens, you would receive 9.091Tokens and that will be a loss of almost 1 Token.

When you make a Sell Order to sell 10 Crypto X Tokens at a market price rate of $5.20. But immediately after the order was placed, the value of Crypto X fell to $4.70. This would be a negative slippage because instead of receiving $52.00, you would receive $47.00, making a loss of $5.00.

Positive Slippage can occur in both Buy and Sell Orders. In the Buy Order, It usually occurs when the Expected Trade Price is placed but the actual price at which the Buy Order was executed drops lower than the Expected Trade Price and because it is a Market Order it automatically adjusts and executes the order. The order buys the asset at a cheaper price than the expected trade price and it implies that more tokens or coins are received than expected.

For the Sell Order, it occurs when the expected trade price is placed but the actual price at which the Sell Order was executed shoots up, higher than the expected trade price and because it is a market order, it automatically adjusts and executes the order. The order sells the asset at a more expensive price than the expected trade price and it implies that fewer tokens are sold for more. It is termed Positive because this type of slippage causes traders to gain profits, rather than making losses.

Example:

Assuming you place a Buy Order of $84 worth Crypto Y at a Market Price of $8.40. But immediately after the order was placed, the price of Crypto Y drops to $8.00. This would be a negative slippage because instead of receiving 10 Crypto Y Tokens, you would receive 10.5 Tokens of Crypto Y, which will be a profit of 0.5 Crypto Ys.

If you place a Sell Order to sell 10 Crypto Y Tokens at a Market Price of $8.80 then immediately after the order was placed, the price of Crypto Y rises to $9.30. This would be a positive Slippage because instead of receiving $88.00 of Crypto Y, you will be receiving $93.00, making a profit of $5.00.

The Bid-Ask Spread is a very crucial concept that sheds a lot of light on the liquidity and also the dominance of the various cryptocurrency assets. It also shows the risk involved in investing in or trading in certain cryptocurrencies. I am very grateful to @awesononso for such a concise lecture. I am looking forward to many of such informative lectures.