Steemit Crypto Academy [Beginners' Level] | Season 4 Week 1 | The Bid-Ask Spread by @jasminemary

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1. Properly explain the Bid-Ask Spread.

In the crypto industry, the bid-ask spread is simply the difference between the highest price of a cryptocurrency that a buyer is willing to pay for the cryptocurrency and the lower price that the seller is willing to accept for the cryptocurrency. Literally, the Bid Price is the highest price of the crypto that a buyer is willing to pay for whereas the Ask Price is the lowest price that the seller is willing to accept from the buyer. This means that cryptocurrency with a small bid-ask spread will be more demanded than a cryptocurrency with a wide bid-ask spread, for this purpose price will become more wider.

In order to understand the bid price and the ask price more better, we have to know those that are the key players in the market,which are the price taker and the market maker. Market makers are sometimes hired by brokerages,to initiates a trade for an investor, they either accept the bid price or the ask price based on whether the investors are willing to buy the coin (ask price ) or sell the coin (bid price). The difference between the two is just the spread. Also the wider the gap,the larger the spread will be. Although the bid-ask spread is expressed in percentage%. In a case when they is highly liquid in the market, the spread value is usually very small, but in a case when it is less liquid,it is usually large. In a nutshell, the market maker is employed to facilitate transactions. They supply bid when there is no bid, and also if there is no offer it is the role of the market maker to supply offer.

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

Cryptos and other related asset in a market take a wide variety of prior illiquid directly held assets and make them available to different investors. Such type of investment strategy reduces risk and also lower costs since the purpose of the assets is to make the securitization wider enough to be more economical.

The Bid-ask spread is very important in a market as is the fundamental concepts that is used in the market when investing and will definitely benefits traders. It is very important as it helps trader to gain an understanding of the concepts of financial market so both the buyer and seller can negotiate the price that is best. In a nutshell, the Bid-ask spread is important in a market in the following ways:

• Bid-ask spread helps trader/investors to determine the liquidity of a assets/cryptocurrency in a market.

• It notified trader on the difference between bid price and ask price, which allow trader to make sound decisions towards price negotiation.

• The Bid-ask spread is also important in the market as it helps bring understanding between the buyer and seller as to when bid is place. The buyer places bid to notify the sellers of the price that he is accepting to pay.

3. If Crypto X has a bid price of $5 and an ask price of $5.20,

a.) Calculate the Bid-Ask spread.

Solution:
Bid-Ask Spread = Ask Price - Bid Price
Bid-Ask Spread = $5.20 - $5
Bid-Ask Spread = $0.2

b.) Calculate the Bid-Ask spread in percentage..

Solution:
%Spread = (Spread/Ask Price) × 100
%Spread = ($0.2/$5.20) × 100
%Spread = $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.

Solution:
Bid-Ask Spread = Ask Price Spread - Bid Price
Bid-Ask Spread = $8.80 - $8.40
Bid-Ask Spread = $0.4

b.) Calculate the Bid-Ask spread in percentage.
Solution:
%Spread = (Spread/Ask Price) × 100
%Spread = ($0.4/$8.80) × 100
Bid-Ask Spread = $4.54

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

From the asset above,the spread of Crypto Y = $0.4 and that of the spread of Crypto X = $0.2. Looking at the both of them, the spread of Crypto X is the smallest. The spread that is smaller shows higher liquidity,which means that Crypto X is the asset that has the higher liquidity.

6. Explain Slippage.

In a nutshell, slippage occurs when an order is executed at a price that is different from what was anticipated or expected by the trader. The price of cryptocurrency can probably change at any point in time. When an order is place to buy or sell crypto, the price of the crypto may change at any point in time until an order is placed. The change in price is known as the slippage. Literally, the slippage is considered as the difference between the price that is expected by the trader and that which is executed in a trade.

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

Positive slippage:
Positive slippage is the slippage where a price is closed or opened at a point that is better compared to what was expected. For example when if you opened a trade, the price will be less than what you intended to open the trade with, offering more value. Let's say that for example you are looking to buy coin A at a price of $250. As the position is opened, the executed price is $240,this means that you have opened a position at $10 which is lesser than what the trade.

OR

Let's say, you intends to trade BTC, closing a position at a price of $250. The executed price that the position is closed at is $275, this means that you have benefited from the slippage to an amount of $25.

Negative slippage:
Negative slippage is considered as the opposite of positive slippage. Is the slippage where any trader can loses value,when the price that is executed is worse than the price that is expected. In a simple terms negative slippage is the order that is given when buying a coin at a price that is higher than the expected price. Example, we intend to trade BTC at a price of $100 and open a long position at the same price. If the trade get executed, however,the price slips and the position is opened for BTC at $101,which is the negative slippage.

OR

Let's say,we are looking to sell BTC at a price of $100 and we close the open position. Due to fluctuation at the time of execution the selling falls to $99, however in this case,we have lost out $1.

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@awesononso