Steemit Crypto Academy || Season 4 week 1 || Homework post @awesonoso

Hello fellow steemians, it is a great pleasure to be here once again. Below is my entry of the assignment.

Properly Explain the bid Spread

In our daily lives, buying and selling is essential. We often buy goods at the market price and also tend to bargain for the price if it does not favor us and the world of cryptocurrency is no exception.
To be able to properly appreciate the bid spread, one needs to know what the bid price is and what the ask price is.

BID PRICE

This is the highest price at which a buyer is willing to pay for a commodity. In the world of trading, the ultimate goal is to maximize profit, and both the buyers and the sellers of a commodity tend to utilize that in their dealings. The bid price gives the buyer an advantage in buying a commodity at the lowest price so as to make a profit from it by making an offer for the commodity below the asking price of the seller.

ASK PRICE

This is the lowest price at which a seller of a commodity is willing to sell the commodity. As already stated, the ultimate goal of every trader is to make a profit. At this point, the seller tends to make a profit from this mechanism.
We now know the meaning of "bid price" and "ask price," which will aid us in understanding the concept of "bid spread.

BID ASK-SPREAD

Bid Ask-Spread is the difference that arises from Bid Price and Ask Price. Simply put, it is the difference between the seller's asking price and the buyer's bid price. For example, if a seller of a commodity asks a price of $100 and the buyer is willing to pay $99.5, the difference between the seller's price and the bid price of the buyer becomes the Bid Ask Spread, which would be ($100-$99.5=$0.50).

Mathematically

BID ASK-SPREAD= ASK PRICE – BID PRICE

In Percentage Wise

%Spread = (Spread/Ask Price) x 100

Why is the Bid-Ask Spread important in a market?

We now know what Bid-Ask Spread is. Let's try to now understand the importance of it.
In the perspective of liquidity, we can observe that the bid-ask spread has an impact on asset pricing. If we have a low price, it implies we will have a higher bid-ask spread.
And also, the Bid-Ask Spread is particularly significant because it can guide traders in determining the general market price movements.

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.

If Crypto X has a bid price of $5 and an ask price of $5.20, calculate the bid-ask spread.

Calculation

Bid Ask-spread =Ask price -Bid price
Ask price=$5.20
The bid price is $5
Bid Ask-Spread= $5.20-$5=$0.20
Bid Ask-Spread = $0.20

Calculate the Bid-Ask spread in percentage

Calculation

%Spread= (Spread/Ask price) ×100
= (0.2/5.20) ×100
=0.03846×100
=3.84%
%Spread=3.84%

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.

If Crypto Y has a bid price of $8.40 and an ask price of $8.80,

CALCULATION

Bid-Ask spread = Ask Price-Bid Price
Ask Price= $8.80
Bid Price=8.40
Bid Ask-price= $8.80-$8.40=$0.40
Bid-Ask spread=$0.40

Calculate the Bid-Ask spread in percentage.

CALCULATION

%Spread =(Spread/Ask-price) ×100
%Spread= (0.40/8.80) ×100
%Spread= 0.04545×100
%Spread= 4.54%

In one statement, which of the assets above has the higher liquidity and why?

In a simple statement, crypto x has higher liquidity than crypto y, because it has a smaller bid ask-spread and assets with lower bid ask-spread tend to have higher liquidity.

Explain Slippage.

In the world of cryptocurrency trading, demand and supply are an important and major factor which drives the prices of assets, which brings about positivity and negativity due to the volatile nature of assets. Slippage, this is a situation where an order for a commodity is being carried out differently from what was expected. For example, if we buy STEEM/USDT at 0.6100 and at the time of execution it executes it at 0.6095, you have gotten a better entry. The reverse of it can also happen where the price of STEEM/USDT is at 0.6100 and at the time of execution it executes it at 0.6105.

Explain Positive Slippage and Negative slippage with price illustrations for each.

POSITIVE SLIPPAGE

This is a situation where an order of a commodity seems to be in favor of the trader, where the expected price of a commodity is being executed differently and therefore needs to go by the current executed price.
There can be two instances of positive slippage, namely: buy positive slippage and sell positive slippage.

BUY POSITIVE SLIPPAGE: This is a situation where a buy order is executed lower than what was intended. For example, we are buying LUNA/USDT at its current price of $150, and after we initiated the trade, it happened that the price changed to $145 during the time of execution. Our buy-positive slippage would be as follows:

Buy Positive Slippage= Order Price – Executed Price
Buy Positive Slippage= $150-$145=$5
Buy Positive Slippage = $5

SELL POSITIVE SLIPPAGE: This is a situation in which a market order to sell is executed at a higher price than the market price. For example, we intend to sell LUNA at $150 and during the time of execution, it was executed at $160, which is way higher than what was intended at the market price.

**Sell Positive Slippage=Executed price-order price
Sell Positive Slippage=$160-$150=$10
Sell Positive Slippage=$10

NEGATIVE SLIPPAGE

As the initials suggest, this is a situation where an order is being executed at an unfavorable price. This type of slippage doesn’t usually favor the trader.

BUY NEGATIVE SLIPPAGE: This is a situation where an order to buy an asset at the current market price is being executed at a higher price than what was intended. For example, we are buying LUNA at its current price of $150, and after we initiated the trade, it happened that the price changed to $155 during the time of execution. Our buy negative slippage would be as follows:

Buy Negative Slippage= Executed Price-Order Price

Buy Negative Slippage= $155-$150=$5

Buy Negative Slippage = $5

SELL POSITIVE SLIPPAGE: This is a situation where an order to sell an asset is being executed lower than expected. For example, we intended to sell LUNA at $150 and during the time of execution, it was executed at $140, which is way lower than what was intended at the market price.

**Sell Negative Slippage=order price-executed price

Sell Negative Slippage=$150-$140=$10

Sell Negative Slippage=$10

CONCLUSION

To conclude, I must say this lesson has been one of the most understandable lessons ever. Bid Ask-Spread is an important indication that every trader shouldn’t look down upon as it can guide one to understand a market trend.

Thank you.

Cc:

@awesononso