Steemit Crypto Academy Season 4, Week 1|Beginner's Course|Homework Post for @awesononso , The Bid-Ask Spread
THE BID-ASK SPREAD
Before we go into the definition of what the Bid-Ask spread is all about, it is of great advantage to proper understanding if we do a break down and make a definition of the Bid price and the Ask price.
BID PRICE
The highest price a buyer is ready to pay for a product is known as the bid spread.
ASK PRICE
The ask price is the lowest price at which a seller is willing to sell a commodity.
BID-ASK SPREAD
As a result of the previous explanation, the Bid-Ask spread, in my own words, refers to the price difference that exists between the seller's and buyer's prices.
Arithmetically, the Bid-Ask spread = Ask price- Bid price.
Furthermore, since traders and market makers are involved in trading, Bid-Ask is the transaction cost, with the price taker always wanting to buy at a low price and the market maker usually wanting to sell at the bid or high price.
WHY IS THE BID- ASK SPREAD IMPORTANT
The concept of the bid-ask spread is frequently employed to measure market liquidity.
For a commodity to be traded swiftly, the supply-demand balance in the marketplaces is critical. The market is liquid when this equilibrium is reached.
There are plenty of buyers and sellers in a liquid market. The bid and ask prices are nearly identical in this scenario. As a result, the price difference between the two will be minimal.
The difference between these two prices is known as the bid-ask spread, as mentioned in the previous question. The bid-ask spread will therefore be narrow in a liquid market.
WHAT WILL BE THE BID – SPREAD IF CRYPTO X’S BID PRICE IS $5 AND ITS ASK PRICE BE $5.20
The bid-ask spread is equal to the difference between the ask and bid prices.
The Bid – ask spread = $5.20 - $5
That is the Bid – ask spread will be = $0.2
If the bid price is $5, the total cost is $5.20 minus $5, which equals $0.20.
b.) CALCULATE THE BID-ASK SPREAD IN PERCENTAGE
The percentage Spread = the Spread / the Ask Price x 100
The percentage Spread = $0.2 / $5.20 x 100
Therefore the percentage Spread = 3.85
WHAT WILL BE THE BID – ASK SPREAD IF THE BID PRICE FOR CRYPTO Y IS $8.40 AND THE ASK PRICE IS $8.80:
The Ask price minus the Bid price will be equal to Bid-Ask Spread
Bid-Ask Spread = $8.8 - $8.4
Bid-Ask Spread = $0.4
CALCULATE THE BID-ASK SPREAD IN PERCENTAGE
The percentage Spread = Spread / Ask Price x 100
The percentage Spread = $0.4 / $8,80 x 100
The percentage Spread = 4.54
WHICH OF THE ABOVE ASSETS HAS A HIGHER LIQUIDITY AND WHY
Crypto X's spread is $0.2, whereas Crypto Y's spread is $0.4. The spread of Crypto X is smaller in this situation. Higher liquidity is indicated by a narrower spread.
Because the purchasing and selling prices are so close together, there are more trades. As a result, Crypto X has more liquidity.
SLIPPAGE
Cryptocurrency exchange prices can fluctuate dramatically. The price of a coin may change until you place a purchase or sell order for it for x price. Slippage is the term for the shift in pricing. Slippage is more prevalent, particularly in large Bid-Ask Spreads. Due to a lack of liquidity, this is the case.
Slippage is the difference between an order's original bid and its current price, and it most commonly occurs in a wider spread since liquidity is low and there aren't many traders trading at that time.
POSITIVE SLIPPAGE
First and foremost, When an order is completed at a lower price than the buyer or trader intended, positive slippage occurs, giving the buyer or dealer a profit.
OR positive slippage occurs when an order is filled at a higher price than the seller requested, resulting in a profit for the seller.
AN EXAMPLE OF POSITIVE SLIPPAGE
Let's say I want to buy products for $60 and I've previously placed an order, but the order was only fulfilled for $56 by the time it was fulfilled. Isn't it fun?
$60 - $56 = $4 is the positive slippage in this case.
It also works in the opposite direction when it comes to selling items. If I wish to sell items for $80, and the deal is completed, the goods will be sold for $85.
$85 − $80 = $5 is the positive slippage
NEGATIVE SLIPPAGE
Negative slippage occurs when an order is executed at a lower price for the seller or the market maker, but at a higher price for the buyer.
AN EXAMPLE OF NEGATIVE SLIPPAGE
Let’s say I want to make an order for $60 to buy a coin was placed, however the coin was purchased at $67 by the time the order was fulfilled.
$67 - $60 = 7 is the negative slippage
It also works in the opposite direction when it comes to selling items. If I wish to sell items for $80, and the deal is completed, the goods will be sold for $75.
The negative slippage will be as follows:
$80 - $75 = $5
CONCLUSION
Bid-Ask spread is a fantastic approach to make an informed decision when buying and selling in a market, but it comes with its own danger because slippage can occur and you may lose money while trading. However, a thorough grasp of Bid-Ask spread will help you prevent excessive losses.
Hello @gboye1,
Thank you for taking interest in this class. Your grades are as follows:
Feedback and Suggestions
You need to understand the topic better and express yourself in your own way. I noticed some parts that were paraphrased from other sources.
The arrangement needs to be improved as well.
Thanks again as we anticipate your participation in the next class.
Thank you Professor.