SteemitCryptoAcademy [Beginners' Level] | Season4 Week1 | The Bid-Ask Spread By @chiwill
INTRODUCTION
This lesson reminds me of a certain time when I went to market to buy something's and when I meet the seller as my usual way I asked for the price of the thing I want to buy, so the seller gave me the price and I started pricing meanwhile I have a fixed price I planned buying that very stuff which is the highest amount for but fortunately that same amount was the lowest price the seller had to sell it, and finally I bought the stuff at that price which is the highest price I planned buying which I bought it and the lowest price the seller also planned selling which he sold it. This is called BID-ASK PRICE.the
THE BID-ASK SPREAD.
🔸 What is Bid Price and Ask Price?
Bid and Ask Price is a two-way price quotation for an asset to be sold and bought in a particular time or at a given point in time. Bid and Ask is also called or known as Bid and Offer.
The Bid Price is the highest price a buyer agreed to pay for an asset. This is the maximum and highest price or amount a buyer is ready to afford or pay for an asset. Bid is also known as Demand For An Asset.
The Ask Price is the minimum and the lowest price a seller planned to sell an asset. This is the lowest price a seller agrees to sell an asset. Ask is also known as Supply For An Asset.
Since we have known what is Bid and Ask Price let's see Bid-Ask Spread.
A Bid-Ask Spread is the gap between Bid and Ask Price. Bid-Ask Spread is the difference between the maximum price that a buyer agrees to buy or pay for a security and the minimum price a seller is ready to release or accept an asset or security.
I want to also say that Bid-Ask Spread is that point of agreement between the buyer and the seller towards the price of an asset.
Mathematical formula is:
Bid-Ask Spread=Ask Price - Bid Price.
Bid-Ask spread in percentage (%Spread) = (Spread/Ask price) × 100
IMPORTANCE OF BID-ASK SPREAD
🔸It gives a clear view of the price of an asset in the market. Letting the buyer and the seller the latest price. By that, It alerts the traders of the difference between Bid and Ask Price of an asset in the market for easy negotiation between the buyer and seller.
🔸It is the meeting point of a buyer and the seller that is the agreement between the highest amount a buyer agrees to pay for an asset and the lowest price a seller agrees to sell an asset.
🔸It indicates the price level of an asset or security at which the buyer wants to buy an asset and the seller wants to sell their assets.
🔸 It helps to arrange the purchase of assets in market chart.
🔸It is the difference between the buyers price and the sellers price.
🔸It determines the liquidity of an asset.
If Crypto X has a bid price of $5 and an ask price of $5.20
🔸a. Calculate the Bid-Ask spread.
Solution:
Recall,
Bid-Ask Spread = Ask Price(A) - Bid Price(B)
Where
X represents Bid-Ask Spread.
Bid price(B) = $5, Ask price(A) = $5.20
X = A - B
X = $5.20 - $5
Therefore, Bid-Ask Spread(X) = $0.2,
🔸b. Calculate the Bid-Ask spread in percentage.
Solution:
%Spread = (Spread/Ask price) × 100
= (X/A)
= (0.2/5.20)
= 0.03846 × 100
= 3.846% or 3.85%
If Crypto Y has a bid price of $8.40 and an ask price of $8.80
🔸a. Calculate the Bid-Ask spread.
Solution:
B = $8.40, A = $8.80
Y = A - B
Y = $8.80 - $8.40
Y = $0.4
Therefore, Bid-Ask Spread(Y) = $0.4
🔸b. Calculate the Bid-Ask spread in percentage.
Solution:
%Spread = (Spread/Ask price) × 100
= ($0.4/$8.80) × 100
= 0.04545 × 100
= 4.545% or 4.54
IN ONE STATEMENT, WHICH OF THE ASSETS ABOVE HAS THE HIGHER LIQUIDITY AND WHY?
Based on the final score. Looking at Crypto Y($0.4) which is wider and bigger than Crypto X(0.2) and Crypto X is smaller Bid-Ask spread which makes it easier to trade, and it has higher liquidity than Crypto Y.
SLIPPAGE
The term slippage is the volatile change in Bid-Ask Spread when the market order have been placed and can occur at any time it could either be positive or negative which is also known as Pros or Cons of slippage and most frequently during the periods or the time of upper volatility when market orders are used. It is the difference in the expected price of an asset and the actual price of an asset to be sold.
Positive Slippage and Negative Slippage with price illustrations for each.
POSITIVE SLIPPAGE:
This happens when the order is executed and suddenly the expected price changes while the order is being executed. Positive Slippage is when the Ask or Bid has decreased or increased in a long or short trade.
Example:
I placed an order for BNB to be bought at $28 and the trade was executed at $26. This is said to be positive slippage because I just gained $2.
And If I place a sell order on BNB for $35, and it was executed on $36. It is all called positive slippage because there are gains.
NEGATIVE SLIPPAGE:
This is the final form of slippage. This form of slippage is where the trader loses value as the executed price is worse than the expected price.
Example:
For instance, I placed an order to buy an ADA at $1.0 and the trade was executed at $1.5.
And I decided to place a sell order of ADA at $1.5, and it was executed at $1.3. All these are negative slippage because of loses.
CONCLUSION
Bid-Ask Spread is the highest price an asset is bought by a buyer and the lowest price a seller agrees to sell an asset.
Slippage can occur when there is volatility in market stock and can be positive slippage and negative slippage.
Thanks
Cc: @awesononso
