Steemit Crypto Academy [Beginners' Level] | Season 4 Week 1 | The Bid-Ask Spread by @enveng
Hi professor @awesononso, first of all, thank you so much for this informative lesson. It was very clear and understandable for me.
1. Properly explain the Bid-Ask Spread.
Firstly, I want to sum Bid price and Ask price up. The highest price of the coin you want to sell is called the Bid price. The lowest price of the coin you want to buy is called the ASK price. Bid-Ask Spread is the difference between Ask price and Bid price. This can be briefly described as the difference between buying and selling. It is expressed mathematically as shown below.
This concept is also called Spread.
2. Why is the Bid-Ask Spread important in a market?
The purpose of Spread is to balance the risk for those who want to reduce the risk by buying at a low price and selling at a high price.
When the buying and selling prices in the market are very close to each other, this shows us that the buyer and seller are in close agreement about the value of the coin. If there is a very wide Bid-Ask Spread, it means that there is a lot of disagreement between buyers and sellers. Therefore, this indicates that the market volume is not large. If the Bid-Ask Spread is very low, it points out that both buyers and sellers agree and the market is efficient. If there are many buyers and sellers who want to trade in the markets, it is called a liquid market.
Liquidity is used to measure the ease with which a commodity can be converted into cash. Therefore, transactions can be carried out easily in a liquid market. As I said above, Bid-Ask Spread will be small when the bid price is close to the ask price. A low spread indicates that the market is liquid. This indicates the high trading volume of the market.
13. If Crypto X has a bid price of $5 and an ask price of $5.20,
a.) Calculate the Bid-Ask spread.
The Ask Price = $5.20
Bid-Ask Spread = Ask price - Bid price = $5.20 - $5 = $0.2
b.) Calculate the Bid-Ask spread in percentage.
= 0.0385 x 100 = 3.85%
4. If Crypto Y has a bid price of $8.40 and an ask price of $8.80,
a.) Calculate the Bid-Ask spread.
The Ask Price = $8.80
Bid-Ask Spread = Ask price - Bid price = $8.80 - $8.40 = $0.4
b.) Calculate the Bid-Ask spread in percentage.
= 0.0455 x 100 = 4.55%
5. In one statement, which of the assets above has the higher liquidity and why?
Crypto X's Bid-Ask Spread is $0.2, Crypto Y's Bid-Ask Spread is $0.4 so Crypto X is more liquid because the value of Crypto X is less than Crypto Y. A low Spread value indicates a large number of investors who want to trade in the markets. This is the liquid market.
6. Explain Slippage.
Slippage is the difference between the price level of the order placed while the opened transaction is closing and the price level at which the order was executed.
When an order is carried out, the asset is bought or sold at the best price offered by an exchange or other market maker. This may result in the level, below or above the asking price. Market prices can change rapidly and slippage can occur during the time between order time and completion time. Slippages occur more in markets with a wide Bid-Ask Spread. Because the low liquidity of the markets means that orders will not always match as predicted.
27. Explain Positive Slippage and Negative slippage with price illustrations for each.
Positive Slippage: A positive slip occurs when a buy order is filled at a lower price than requested. It is a positive slippage when a sell order is filled at a higher price than requested.
For example (Buy): If a transaction for crypto A to be bought at $100 and it was executed at $99, the Positive slippage will be;
$100 - $99 = $1
(Sell): if a transaction for crypto A to be sold at $200 and it was executed at $202, the Positive slippage will be;
$202 - $200 = $2
Negative slippage: Filling a buy order at a higher price than desired is a negative slippage. Filling a sell order at a lower price than requested is a negative slippage, too.
For example (Buy): If a transaction for crypto B to be bought at $250 and it was executed at $250.6, the Negative slippage will be;
$250.6 - $250 = $0.6
(Sell): if a transaction for crypto A to be sold at $250 and it was executed at $249.6, the Negative slippage will be;
$250 - $249.6 = $0.4
It has been a very useful education for making successful trades by minimizing losses by using Spread.
CC: @awesononso
Thank you, This is what maths problems should look like in school. Because this knowledge is there, which can bring great profit to today's children in later life.
You are so right. Life is changing fast and some of the available education is insufficient. Education must be updated to prepare for real life.