Crypto Academy /Season 4 / Week 1 - Homework Post for Professor @awesononso On Bid- Ask Spread by @joelmaxwell

Introduction

Hello Steemians am @joelmaxwell and am very happy that cryptoacademy is back and I hope to do my very best. This week lecture is about the Bid-Ask spread and I will be answering questions.

Questions 1

Properly explain the Bid-Ask Spread.

          Answer

The Bid-Ask spread has to do with the price of commodity in different aspect both from the buyers part and from the sellers point of view.

The Bid spread has to do with the highest or maximum price that a buyer will be willing to pay for a particular commodity in a particular time. By this I mean the highest price that the buyer is ready to pay for the commodity at that time.

The Ask spread, this is the inverse of the Bid spread, it has to do with the lowest or minimum price that a seller of a commodity is ready to sell the goods at that particular time. By this I mean the least price that the seller will be willing to sell his commodity.

The Bid-Ask spread is therefore the difference between the ask price and the Bid price.
It is very important in the market because it helps traders know when the market is liquid and illiquid by this when the Bid-Ask spread is small that mean that the market is liquid and easy for traders to trade but when it is high it is high it is illiquid and difficult for trading.
The mathematical form of calculating The Bid-Ask spread is

Bid-Ask Spread = Ask price - Bid price

Question 2

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

         Answer

The Bid-Ask spread is very important in the market in as much as it has to do with traders and price of commodity which makes it a factor of how commodity are being demanded and how the are supplied in the market at a particular time
Another important factor to consider about the Bid-Ask spread in the market is the fact of liquidity because when the market is liquid they Bid-Ask spread will be small and the market will be easy due to this many buyers enter the market and buy assets and also a large number of seller will be coming to sell their assets.
But if the Bid-Ask spread is high it will make the trading of assets between traders hard by this we say that the market is difficult and illiquid because it will be hard for the traders to come and sell their commodity same as it will be hard for buyers to come and buy.
So the Bid-Ask spread is very important.

Question 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.

              Answer

A) when calculating for Bid-Ask spread we should remember the the formula is

Ask price - Bid price

Here the Ask price = $5.20
And the Bid price= $5

Therefore (Bid-Ask spread) = $5.20 - $5
= $0.20

B) Here percentage spread will be

%Spread = 100 x (Spread/Ask price)
%spread =100 x ( $0.20/ $ 5.20)
%spread =100x ( 0.0385)
%spread = 3.85%

Question 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.

         Answer

A) when calculating for Bid-Ask spread we should remember the the formula is

Ask price - Bid price

Here the Ask price = $8.80
And the Bid price= $8.4

Therefore (Bid-Ask Spread) = $8.8 - $8.4
= $0.40

B) Here percentage spread will be

%Spread = 100 x (Spread/Ask price)
%spread =100 x ( $0.40/ $ 8.80)
%spread =100x ( 0.0454)
% spread = 4.54%

Question 5

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

         Answer

First of all, when we talk about high liquidity it has to do when the Bid-Ask spread is small or minimal.
Here the Bid-Ask spread of crypto x which is $0.2 is smaller than that of crypto Y which is $0.4 and by this it mean crypto x has a higher liquidity than Y because it is smaller than crypto Y making trading easy for traders.

Question 6

Explain Slippage.

        Answer

Slippage has to do with the deviation or changes that may occur to a trader that was ready to buy or sell his or her coin in any cryptocurrency exchange market but to his surprise he or she will fail to get it at the plan price because of a particular thing known as slippage especially when it comes to cryptocurrency because of how volatile it is and this spillage may cause the trader to gain and also lose funds.
We have 2 type of slippage which are the positive slippage where the trader gain and the negative slippage which the trader losses funds due to this changes.

Question 7

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

          Answer

Positive slippage

The positive slippage is a favourable slippage to the traders because there are going to gain from it, here the traders tend to execute the order he plan for may be at higher price will be at a lower price than what he actually plan instead.
For example, here I will be using myself has the trader and I will be playing the part of the buyer.
Let say I plan of buying a tron at the rate of $10 which was the market price but all of a sudden a slippage occur making the price which I intend buying($10) to fall to $8. The slippage now will be $10 - $8 = $2, making me as a buyer to gain and this will be favourable because I will not lose anything but rather I may want to increase the buying.
Using myself as a seller
I wanted selling tron at the price $12 and all of a sudden the price rises to $15
The Slippage will be
$15 - $12 = $13
This will be favourable to me because I will be having enough profit from selling the coin.
Through the example I use I will not lose anything making this type of slippage a favourable one.

Negative slippage

The Negative slippage is an inverse of the positive slippage here it is an unfavorable slippage because the trader tends to lose their funds.
I will be using myself as an example.
Firstly as a buyer, I plan buying tron at $7 and all of a sudden the price rise and I finally end up buying it at $8.
The slippage will be $8 - $7= $1
which will be unfavorable for me because I will have to increase the funds from what I plan making me lose funds.

Using myself as the seller
I plan selling tron at $6 but all of a sudden the price drop to $4.
The slippage will be $6 - $4 = $2
Making me sell it lower than I plan and instead of gaining I will be losing.

Conclusion

The lecture have been a very interesting one as we were taught on how the Bid-Ask spread is important in the market. We were also taught about the positive and negative slippage.
It was really and interesting one, thanks to prof @awesononso for giving up this impactful lecture