Steemit Crypto Academy [Beginners' Level] | Season 4 Week 1 | Task 1: The Bid-Ask Spread by Prof. @awesononso
Dear fellow Steemians,
It's great to begin a new Season in Steemit Crypto Academy. I am very happy for this first topic and the way professor @awesononso explained it. It is very clear and easy to comprehend. The mathematical calculations are very easy and interesting.
I am glad to present my home work task.
HOME WORK TASK
QUESTION 1
Properly explain the Bid-Ask Spread
Bid-Ask Spread is the difference between the highest price someone (a buyer) is ready to pay for an asset and the lowest price which another person (a seller) is willing to sell his or her asset. The “bid-ask spread” in a very simple term is the difference between the buyer’s price and the seller’s price.
For example, If Mr. Chukwudi has made up his mind that the highest amount he can buy 1 steem is at #300, that if it sells more than that price that he will never buy. Then #300 for 1 steem becomes his Bid price. If Mrs Joy wants to sell her steem and she has decided that the cheapest price she can sell is #300.50, her Ask price becomes #300.50 per steem.
Therefore, the Bid-Ask Spread of the above example is the difference between that #300 Mr. Chukwudi has made up his mind to buy 1 steem and the #300.50 last price that Mrs Joy has decided to sell. This is the calculation using the formular "Bid-Ask Spread = Ask price - Bid price", we have #300.50 - #300 = #0.50. So, the Bid-Ask Spread is #0.50.
QUESTION 2
Why is the Bid-Ask Spread important in a market?
The Bid-Ask Spread is very important in a market because it helps us understand market trend in order to negotiate the best price when we want to buy or sell assets. It is important also because we use it to determine liquidity in the markets.
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.
Solution 1:
a.) Calculate the Bid-Ask spread of bid price of $5 and an ask price of $5.20
The Bid Price = $5
The Ask Price = $5.20
Formular: Bid-Ask Spread = Ask price - Bid price
= $5.20 - $5
= $0.20
Solution 2:
b) Calculate the Bid-Ask spread in percentage.
Formular: %Spread = (Spread/Ask price) x 100
= ($0.20/$5.20) x 100
Aproximately 0.03846 x 100
Aproximately 3.85%.
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.
Solution 1:
a.) Calculate the Bid-Ask spread of bid price of $8.40 and ask price of $8.80
The Bid Price = $8.40
The Ask Price = $8.80
Formular: Bid-Ask Spread = Ask price - Bid price
= $8.80- $8.40
= $0.40
Solution 2:
b) Calculate the Bid-Ask spread in percentage.
Formular: %Spread = (Spread/Ask price) x 100
= ($0.40/= $8.80) x 100
Aproximately 0.04546 x 100
Aproximately 4.55%.
QUESTION 5
In one statement, which of the assets above has the higher liquidity and why?
The assets in crypto X has the higher liquidity than that of crypto Y because crypto X has a smaller Spread.
QUESTION 6
Explain Slippage.
Slippage means the price difference between the price a trader expected and the price at which the trade is executed.
For example, I wanted to buy a product and I ordered for it at #5,000, which is the price I indented to buy the product, but because the product was not readily available, it took some time for the order to be executed and when the order was finally executed the price of the product changed to #5,500. The Slippage here is the difference between the #5,000 I expected to buy the product and the #5,500 I later bought the product when the order was executed. Which is #5,500 - #5,000 = #500.
Slippage occurs when an order is executed at a price different from what the trader has in mind. It happens when the bid/ask spread changes within the time a market order is requested and the time the order is executed . Slippage can also take place when there is no enough volume at a certain price to maintain the current bid/ask spread and a large order is executed. Slippage does not only happen in crypto markets, it also occurs in all market venues like equities, bond etc.
QUESTION 7
Explain Positive Slippage and Negative slippage with price illustrations for each.
Positive Slippage:
Positive Slippage refers to the type of slippage that occurs when a buyer's order is favourably executed at a lower price than intended or when a seller's order is favourably executed at a higher price than the person expected.
For example, If I placed an order to buy cryto at the ask price of 1.1050 and when my order was executed, the cryto price favourably dropped to a lower price of 1.1049. In this case, I have experienced a positive slippage. The calculation would be the difference between the ask price I ordered the crpto and the favourable lower price the crpto was executed, which is 1.1050 - 1.1049 = 0.0001.
On the other hand, If I placed to sell my cryto at the bid price of 1.1050 and when my order was executed, the cryto price favourably increased to a higher price of 1.1052. I have also experienced a positive slippage. The calculation would be 1.1052 - 1.1050 = 0.0002
Negative slippage
Negative slippage is a direct opposite of positive slippage. It refers to the type of slippage that occurs when a trader's order is executed at a worse or less favorable price than expected. That is, the buyer's order is less favorably executed at a higher price than intended or the seller's order is less favorably executed at a lower price than intended.
For example, If I placed an order to buy cryto at the ask price of 1.1270 and when my order was executed, the cryto price unfortunately increased to 1.1273. I have experienced a negative slippage. The calculation would be the difference between the ask price I ordered the crpto and the unfortunate higher price the crpto was executed, which is 1.1273 - 1.1270 = 0.0003
On the other way round, If I placed an order to sell my cryto at the bid price of 1.1273 and when my order was executed, the cryto price unfortunately dropped to a lower price of 1.1270. I still experienced a negative slippage. The calculation would be 1.1273 - 1.1270 = 0.0003.
Conclusion
Proper understanding of Bid-Ask Spread concept is very important for everyone who wants to be a good trader. Bid-Ask Spread helps us to understand market trend in order to negotiate the best price when we want to buy or sell assets.
I sincerely appreciate our lecturer, @awesononso for the lecture.
Thank you for reading my post.