Steemit Crypto Academy | Season 4 Week 1 | The Bid-Ask Spread
In a market one is looking forward to sell (bid price) while the another is looking forward to buy (ask price), illustrating demand and supply, where the bid price represents demand and the ask price represents supply. So the Bid-Ask spread shows the difference between the highest amount of assets price buyers are ready and willing to pay and the lowest amount of assets price sellers are ready and willing accept or sell.
Mathematically illustrated as Bid-Ask Spread = Ask price - Bid price
For example, If the bid price of an asset is $6 and the ask price for the same asset is $7, then the bid-ask spread for that asset is $1. Also it can be calculated in a percentage by expressing $1 ÷$7 ×100%, which be 14.3% (1sf).
The Bid-Ask spread is a transaction where the price takers buy at ask price and sells at bid price. It is also measured in market liquidity.
The Bid-Ask spread is important because, it help traders to be able to determine the liquidity of an asset in the market, thus to know that the buyers and sellers are in equilibrium or equal in the market. Which means that buyers who are ready and willing to pay or buy are equal to the sellers who are also ready and willing accept or sell an asset through demand and supply. Through this traders will be able to know the low spread, since the bid and ask price is close to each other and as the difference between bid and ask price is also small, the Bid-Ask spread will also be small in the market, making the spread of that asset low and increases its volume, which will help traders to trade well in the market.
a.) Calculate the Bid-Ask spread.
b.) Calculate the Bid-Ask spread in percentage
a. Bid-Ask spread.
Given that:
Asset = Crypto X
Bid price = $5.0
Ask price = $5.20
Bid-Ask Spread = ?
But mathematically
Bid-Ask spread = Ask Price - Bid Price
》Bid-Ask Spread = $5.20 - $5.0
Hence Bid-Ask Spread = $0.20
Therefore, if Crypto X has a bid price of $5 and an ask price of $5.20, the Bid-Ask spread is $0.20
b. Bid-Ask spread in percentage
Mathematically
Bid-Ask spread percentage = (Spread/Ask Price) x 100
Where,
Spread = $0.20
Ask price = $5.20
》Bid-Ask spread percentage = ($0.20/$5.20) × 100
》Bid-Ask spread percentage = $0.0385 × 100
Hence Bid-Ask spread percentage = 3.85%
Therefore, if Crypto X has a bid price of $5 and an ask price of $5.20, the Bid-Ask spread percentage is 3.9%(1s.f)
a.) Calculate the Bid-Ask spread.
b.) Calculate the Bid-Ask spread in percentage
a. Bid-Ask spread
Given that:
Asset = Crypto Y
Bid price = $8.40
Ask price = $8.80
Bid-Ask Spread = ?
But mathematically
Bid-Ask Spread = Ask Price - Bid Price
》Bid-Ask Spread = $8.80 - $8.40
Hence Bid-Ask Spread = $0.40
Therefore, if Crypto Y has a bid price of $8.40 and an ask price of $8.80, the Bid-Ask Spread is $0.40
b. Bid-Ask spread in percentage
Mathematically
Bid-Ask spread in percentage = (Spread/Ask Price) x 100
Where,
Spread = $0.40
Ask price = $8.80
》Bid-Ask spread in percentage = ($0.40/$8.80) x 100
》Bid-Ask spread in percentage = $0.0455 × 100
Hence Bid-Ask spread in percentage = 4.55%
Therefore, if Crypto Y has a bid price of $8.40 and an ask price of $8.80, the Bid-Ask Spread in percentage is 4.6%(1s.f)
Crypto X has the higher liquidity. The reason been that crypto X has low spread, and since the lower the spread of an asset the higher liquidity of that asset and also the spread of crypto X and Y are close to each other as shown below; crypto X and Y has $0.20 and $0.40 spread respectively.
Slippage is a financial term in cryptocurrency trading, and other markets avenues like bons, equities and many more, where in such situation traders receive different execution price order than the expected price in the market. It happen when Bid-Ask spread changes within the time frame in which an order is requested and the time in which the market maker executes the order.
Slippage occur at any time an order is requested but dominant in high volatility and also when there are more orders been executed in the market.
In short, slippage is the difference or change between the time which an expected trade price and the price at which thetrade is executed.
Positive slippage occurs when the price of crypto asset falls from the expected price the order is filled to favour the trader since the trader's purchasing or buying power will increase.
For buying order, the price is filled below the expected price, and for selling order, the price is filled above the expected price at which the seller placed the order.
For example, if a trader placed a buy order of a crypto asset of $22 and the executed order is $20 there wil be a positive slippage of $2, as shown below;
$22 – $20 = $2
Moreover, if a trader placed a sell order of a crypto asset of $20 and the executed order is $18.5 there wil be a positive slippage of $1.5 as shown below;
$20 – $18.5 = $1.5
Negative slippage is the invers of positive slippage, it occurs when the price of a crypto asset increases from the expected price in which the filled order is not in favour of the trader since the trader's purchasing or buying power will reduce.
For buying order, the price is filled above the expected price, and for selling order, the price is filled below the expected price at which the seller placed the order.
For example, if a trader placed a buy order of a crypto asset of $8 and the executed order is $9.5 there wil be a negative slippage of $1.5, as shown below;
$9.5 – $8 = $1.5
Moreover, if a trader placed a sell order of a crypto asset of $6 and the executed order is $7there wil be a negative slippage of $1 as shown below;
$7 – $6 = $1
I will like to thank professor @awesononso for this wonderful lecture, i have learnt alot especially how to calculate for Bid-Ask spread and Bid-Ask spread percentage.