Crypto Academy /season 4/ Week 1 - Homework Post for Professor @awesononso || Bid-Ask spread by @beewrites

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Greetings crypto lovers, Greetings Professor @awesononso. Thank you for the lecture on Bid-Ask spread. This is my entry on the assignment.

1. Explain Properly The Bid-Ask spread

This is a term well known in the crypto world and finance market at large.

Bid PriceBid Price refers to the maximum amount a buyer would want to give out in purchase of an asset.

Ask PriceThe Ask Price on the other hand is the seller's least or lowest amount he/she is willing to accept for the same asset the buyer wants.

The Bid-Ask Spreadotherwise called the spread is the best price at which a buyer is willing to buy and the seller is willing to sell an asset at a particular time. This is to say the Bid-Ask Spread of a cryptocurrency, isn't fixed, it varies from time to time. The Spread can vary due to some factors like;

•liquidity: When the Bid price and Ask Price are very close and the difference between them is narrow, it will facilitate trade. When spread widens, liquidity reduces and trade reduces, but when spread tightens or narrows, liquidity increases and trade increases.

•Volatility: It occurs when there is a rapid fall or decrease in the value of an asset in the market. When volatility happens, the Bid-Ask Spread is wider. During this period, trade is often less.

•Stock Prices: The stock price affects the Bid Ask Spread because if the prices are low, the spread will be larger and wider. Usually, when there is much demand for an asset, the bid price increases, on the other hand, when there is a decrease in an asset demand, the ask price decreases.
Bid price and Ask Price is negotiated, then a trade is achieved.

Mathematically, Spread can be calculated in absolute method

Bid-Ask Spread = Ask Price- Bid Price

It can also be calculated by percentage
% Bid - Spread = (spread/Ask) * 100

2.. Why is the Bid-Ask Spread important in the market?
The usefulness of Bid Ask Spread cannot be hidden or unlooked in the crypto market.
• It points out the difference between the Bid price and the Ask price. This is to guild the trader in making profitable negotiations so as to avoid loses.
•It is a check or measurement to know the liquidity of any stock because the higher liquidity, the more trade will occur
• The spread detect the level of risk of a stock, when the spread increases, the risk of trading increases.
• The Bid-Ask Price shows the level the seller will sell and the level the buyer will buy
• The Bid Ask price function as a wind vane that tells us the direction the market is moving at that given time.

3.. If Crypto X has a big price of $5 and an ask price of $5.20
a) calculate the Bid Ask Spread

Solution
Formula for calculating Bid Ask Spread is the difference between Ask price and Bid Price.
Bid Price = $5
Ask price = $5.20

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

b) calculate the Bid Ask Spread in percentage

solution
% Bid Ask Spread = (spread÷Ask price) × 100
% Spread = ($0.2 ÷ $5.20) × 100
% Spread = ($0.0385) × 100
% Spread = 3.85%

4.. If Crypto Y has a Bid Price of $8.40 and Ask Price of $8.80
a) calculate the Bid Ask Spread

solution
Since the Bid Ask Spread is the difference between the Ask Price and the Bid Price
Bid Price : $8.40
Ask Price : $8.80

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

b) calculate the Bid Ask Spread in percentage

solution
% Spread = ( Spread ÷ Ask) × 100
% Spread = ($0.40 ÷ $ 8.80) × 100
% Spread = ($0.045) × 100
% Spread = 4.5%

5.. In one statement which of the two assets have a higher liquidity and why?
Crypto X have a higher liquidity

6.. Explain Slippage: Slippage is a crypto term used when traders/ buyers trades an asset for a different price than they initially intended. Usually, when an order is placed, the both parties (buyer and seller) intend the trade to be at a particular price, but that price can be altered, this result in what is called slippage.
Slippage happens at all times especially and more serious in unstable cryptocurrencies . Spillage in Crypto happens bacause of these reasons
•Volatility of the Cryptocurrency Since Cryptocurrencies are always in movement, slippage is very likely to occur . This unstableness is always frequent in the decentralized exchange. When this happens, the Bid-Ask Spread on the Cryptocurrency is wide and high.
•High demand of the Cryptocurrency can also cause slippage

7.. Explain the positive and Negative Slippage with prove illustration for each

Positive Spillage:
It is a order where the prices are very favourable.
When the initial price is lower than the newly price, a positive spillage is said to have happened in favour of the buyer. This is when there is a fall in price which automatically increases your buying power. This is positive because it gives the buyer much more than they expected to get.
A positive slippage is in the seller's favour when there is an increment in the price rate.
Whenever a Positive Slippage happens, it is always in favour of either the buyer or the seller

illustration
• If a trade order was made and Mr Zach was to buy a cryptocurrency for $12, but instead there was Slippage and he bought it for $12.3, that is a positive slippage in favour of Mr Zach the buyer.
Mr Zach's Positive slippage = $12.3 - $12
Mr Zach has a slippage of $0.3

• If a trade of a cryptocurrency was placed to be sold at $5 and it was eventually sold at $5.20, this is a favourable spillage to the seller.
The Seller's Positive slippage = $5.20 - $5
The seller has a Slippage of $0.2

Negative Slippage:
It is a negative Slippage because it is an order with a lot of unfavorable prices.
For a buyer, it is a negative Slippage because it is higher than the budgetted or intended price
For the seller, slippage is Negative because it is lesser than the intended price

illustration
• If a trade was placed for Crypto XY to be bought for $30 and eventually it slipped to $30.7
The Negative Slippage is $30.7 - $30
Which is $0.7

• If Crypto AB was to be sold for $77 as intended, but after going through Slippage, it was sold for $70
The Negative Slippage is $77 - $70
Which is $7

Best regards to our professor @awesononso
@cryptoacademy