Steemit Crypto Academy [Beginners' Level] | Season 4 | Week 1 | The Bid-Ask Spread for @awesononso | by@dhanux94
Hi steemians,
Properly explain the Bid-Ask Spread.
We will start with an example to understand this simply. I am Dhanu. My friend is Dilini. I am the seller and my friend Dilini is the buyer. I have an item called X and I have a lowest ask price of 200 for it. But Dilini is willing to pay the highest bid price of 190 for it.
Here the lowest price I would like to sell is the Ask price and the highest price she would like to pay is the Bid price. Often the demand price is higher than the bid price. These two prices are rarely the same. In trading, any party must agree to the price of the opposite party. So Dilini will have to agree to Dhanu's price. That's when the trading takes place.
Bid-Ask spread is the difference between a ask price and a bid price. So, simply put, it's the difference between the lowest price Dhanu wants to sell and the highest value that Dilini wants to give for it.
Bid-Ask Spread = Ask price - Bid price
= 200 - 190
= 10
Below is the spread of this Bid-Ask spread for steem dollars.
It shows buyers on the green side and sellers on the red side. The arrows show the bid price, the ask price and the spread. The area circled in blue indicates the gap between the bids.
Why is the Bid-Ask Spread important in a market?
The Bid-Ask spread is important in determining the market liquidity of a product. That is, it warns them of the difference between bidding and solicitation, which we talked about in the question above. Demand for this specialty has grown significantly as a result of recent corporate scandals. As demand increases, so does supply, and the spread decreases. That is, there is some liquidity to the product. That is, it benefits the sellers who are willing to do so . The higher the spread, the lower the liquidity. It shows that buyers and sellers do not like it. So the spread allows the seller to negotiate and make a good decision about the product. That is a good thing for the market to survive.
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.
Bid price = $5
Ask price = $5.20
Bid-Ask spread = Ask price - Bid price
= $5.20 - $5
= $0.2
Spread percentage = (Spread / Ask price) × 100%
= ($0.2/ $5.20) × 100%
= 3.846%
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.
Bid price = $8.40
Ask price = $8.80
Bid-Ask spread = Ask price - Bid price
= $8.80 - $8.40
= $0.40
Spread percentage = (Spread / Ask price) × 100%
= ($0.40/ $8.80) × 100%
= 4.545%
In one statement, which of the assets above has the higher liquidity and why?
As the spread decreases in crypto X, its liquidity increases. As the spread of Crypto Y increases, so it is liquidity decrease.
Increased liquidity means more trade. That is, the faster the demand and supply for crypto X, the more sales there are.
Explain Slippage.
Slippage simply means that the price at which it operates is lower than we expected, and it ends when no transaction takes place. It is the departure from the actual market price at which a person intends to sell or buy. This often happens due to low liquidity and then lack of traders. See how to sell an SBD in the image below.
Here the bid price is higher than the lowesk ask price. In this case, even if the order is placed, trading will not take place until the bid price is lower than the ask price.
Explain Positive Slippage and Negative slippage with price illustrations for each.
If a buyer or seller makes a profit, it is a positive slippage.
A dealer is ordered to buy a steem for $ 0.570. It shows a bid price of $ 0.560 per steem when the order is processed due to slippage. The seller then lowers the price of the steem and bids for it. Then,
Positive slippage = $0.570 - $0.560
= $0.010
This is a positive slippage and you can buy more. This can lead to larger or smaller advantages as the values change.
If a buyer or seller makes a loss, it is a negative slippage.
A dealer is ordered to buy a steem for $ 0.835. It shows a bid price of $ 0.840 per steem when the order is processed due to slippage. Its bid price has gone up. The buyer then increases the price of the steem and bids for it. Then,
Negative slippage = $0.840 - $0.835
= $0.005
This is a negative slippage and you will not be able to buy more. This price deviation is disadvantageous to the trader. This can lead to larger or smaller disadvantages as the values change.
Conclusion
Although the spread of Bid-Ask is a good way for the seller and the buyer to make a decision when buying and selling in the market, fluctuations can also cause slippage, so there can be some loss as well as profit in the transaction, but an accurate understanding of bidding can be obtained.
Cc : @awesononso
Thank you
