Crypto Academy / Season 4 / Week 1 - Homework Post for [@awesononso]
Hello dear friends, today I will share with you the task of the cryptoacademy suggested by the teacher @awesononso.
This week's topic is a basic topic and it is also a very interesting topic to understand how the Bid-Ask Spread works.
Without further ado, I now share the answers to the assignment.
1. Properly explain the Bid-Ask Spread.
When we speak of the term market we will find that there are people who act as sellers and others act as buyers.
The act of bidding is known as a bid, and the act of buying is known as an ask.
In the exchange of supply and demand there are constantly variations in prices, as different factors influence the psychology of buyers and sellers.
In order to determine the behavior of a market, one of the elements taken as a reference is the bid-ask spread.
We have the following:
Bid price: It is the lowest price at which a seller expects to sell.
Ask price: It is the maximum price that a buyer is willing to pay.
The differential of supply and demand is:
Bid-Ask Spread is: Purchase price (ask price) - Selling price (bid price)
2.Why is the Bid-Ask Spread important in a market?
the Bid-Ask Spread is important because it allows us to know the degree of liquidity of a market.
While the result of the subtraction is greater, it indicates a market with less liquidity.
When the result of the subtraction is less, it indicates a market with more liquidity.
Liquidity refers to the ease of selling or buying. A liquid market is one where you can sell or buy quickly, prices are stable, and when selling the loss of value is slight.
In markets with little liquidity, buying and selling is more difficult and slower, because there are few investors and people do not want to buy.
So, interacting in a liquid market is more favorable.
Thus, we know that we are facing a market that has liquidity when the differential between supply and demand is lower.
Then, the Bid-Ask Spread important in a market, because it let know the liquidity of market.
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.
a.) Spread= Ask pice - Bid Price
= $5.20 - $5
= $0.20
b.) %Spread= (Spread/Ask price)100
= (0.20/5.20)100
= (0.038)*100
= 3.84%
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.
a.) Spread= Ask pice - Bid Price
= $8.80- $8.40
=$0.40
b.) %Spread= (Spread/Ask price)100
=(0.40/8.80)100
=(0.045)*100
=4.54%
5.In one statement, which of the assets above has the higher liquidity and why?
Of the above assets, the one with the highest liquidity is Crypto X because the percentage difference between the buy and sell prices is lower.
6. Explain Slippage.
Slippage occurs when an order is executed at a different price than expected.
This occurs frequently in crypto markets due to the low liquidity of these markets.
The percentage difference between the buy and sell prices are wide.
7. Explain Positive Slippage and Negative slippage with price illustrations for each.
Positive slippage occurs when a buy order is executed at a lower price than was expected.
For example, if I placed an order on Steem's domestic market to buy Steem for 0.084 SBD / Steem, and finally the order was executed for 0.083 SBD / Steem, then a positive slippage occurred.
A negative slippage occurs when a buy order is executed for a higher price than expected.
For example, if I placed an order in the Steem internal market, to buy Steem / SBD for 0.078, but the order is executed for 0.079 Steem / SBD, then it is said that a negative slip occurred, because I ended up paying more than what that I expected.
Conclusion
Bid-Ask Spread is a very important element when it comes to knowing the behavior of the market. It allows us to know if the market is liquid or, on the contrary, it is a market with low liquidity.
Knowing the Bid-Ask Spread, will allow us to avoid negative slippage, and will help us to enter the market when there is greater liquidity that makes positive slippage possible.
Thank you very much to professor @awesononso for this class, I hope I have met the planned objectives.