steemit crypto academy // season 4 week 1 // homework post for professor @awesononso

QUESTION 1
Properly explain the Bid-Ask Spread.

The Bid-Ask Spread

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The Bid Price is the highest price in which a buyer in the market is willing to pay for a particular asset.
The Ask Price Is the lowest price in which a seller is willing to sell a particular asset.

The Bid-Ask Spread is the difference between the bid price and the ask price.

Mathematically,
Bid-Ask Spread = Ask Price – Bid Price

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

Importance of the Bid-Ask Spread

The bid-ask spread is important in trading in many aspect which I will be explaining below.

Determining Volatility

The bid-ask spread can be used to determine the volatility of the market or a particular asset. We see that when we have a small bid-ask spread, it indicates a high volatility for that particular asset and when we have a large bid-ask spread, it indicates a low volatility for that particular asset. We can use this as traders in trading efficiently as we know it will be proper to engage in asset with lower spread.

To Brokers

The bid-ask spread is particular useful for brokers. That is where brokers make their own profits. We may be wondering at times how brokers make their own profits from the services they offer to traders. It is at this juncture that the bid-ask spread comes in. the brokers use the aspect of the bid-ask spread. They make their own profits through spread which is the difference between the bid price and the ask price. This is why all trades we place always begin with negative when trading with leverage.

Asset price Impact

The prices of assets are influenced by the bid-ask spread. With a low price, it indicates larger bid-ask spread. And with a high price it indicates a lower bid-ask spread.

QUESTION 3
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.

Calculating the Bid-Ask Spread

Bid price = $5
Ask price = $5.2

A)

Bid-Ask Spread = Ask Price – Bid Price
5.2 – 5 = $0.2

B)

%Spread=(Spread/Ask-price)x100
0.2/5.2 X 100
3.84%

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.

Calculating the Bid-Ask Spread

Bid price = $8.4
Ask price = $8.8

A)

Bid-Ask Spread = Ask Price – Bid Price
8.8 – 8.4 = $0.4

B)

%Spread=(Spread/Ask-price)x100
0.4/8.8 X 100
4.54%

QUESTION 5
In one statement, which of the assets above has the higher liquidity and why?

Which of the assets have higher liquidity

In one statement, a higher liquid asset is an asset which has a smaller bid-ask price, and $0.2 is the smaller bid-ask price, so it has higher liquidity.

QUESTION 6
Explain Slippage.

Slippage

Slippage is phenomenon in which orders are executed in a different price other than the one it was initially intended to be.
It is true that we have into situations in which we place trades and the order is executed different from what we ordered for. Some times the difference happens to be in our favour and sometimes not. As the name implies, it shows they is a slip of prices before execution. This often happens due to high volatility of assets, particular cryptocurrencies. This makes orders get triggered different from the prices which it was intended.

The slippage mostly occurs in assets with a wide bid-ask spread which is an asset with lower liquidity.
There are two types of slippage;

• positive slippage
• negative slippage

QUESTION 7
Explain Positive Slippage and Negative slippage with price illustrations for each.

The Positive and Negative Slippage

A) The Positive Slippage

The positive slippage is a type of slippage which occurs when an order is filled at a price which is more favorable than the initial price which was intended. This will be explained in the buy and sell scenarios

For a Buy Order

A positive slippage occurs when an order is filled at a price lower than the intended price.
Example:
An asset is bought at a price of $2 and is filled at $1.5,
Positive slippage is $2 - $1.5 = 0.5

For a Sell Order

A positive slippage occurs when an order is filled at a price which is higher than the intended price.
Example:
An asset is sold at a price of $2 and is filled at $2.5,
Positive slippage is $2.5 - $2 = 0.5

B) The Negative Slippage

The negative slippage is a type of slippage which occurs when an order is filled at a price which is less favorable than the initial price which was intended. JUST AS above, we have it occurrence for both the buy and sell conditions

For a Buy Order

A negative slippage occurs for a buy order when an order is filled at a price higher than the price which was intended
Example:
An asset is bought at a price of $16 and is filled at $16.2,
Negative slippage is $16 - $16.2 = -$0.2

For a Sell Order

A negative slippage for a sell order occurs when an order is filled at a price lower than the price which it was intended.
Example:
An asset is sold at a price of $21 and is filled at $20
Negative slippage is $20 - $21 = -$1

Conclusion

We have seen positive and negative slippage how they are occur and how they affect traders positively and negatively. It is true that we cannot run totally from slippage, but with proper analysis of trades even if we have a negative slippage we can hope to get back into profits again.
We have also seen the bid-ask spread which is the difference between the bid price and the ask price.

Cc
@awesononso