Crypto Academy Season 4 Week 1 - Homework Post for Professor @awesononso || Bid- Ask Spread
Hello fellow steemians, it's a wonderful week and a great pleasure to attend the first lecture of this new season. All thanks goes to the Almighty Allah and also a big thanks goes to Professor @awesononso who took his time and make sure to digest this lecture to our understanding. This lecture was really helpful as I learned a lot from it.
Below is my homework submission post.
The term Bid-Ask consist of two independent words which are Bid and Ask. In order to make it more understandable, I will like to define what Bid is and what Ask is in the Bid-Ask spread concept.
The word Bid in the Bit-Ask spread concept basically refers to the willingness or desire of a buyer to buy or purchase an asset or good at a certain price. In an economic sense, we can say the Bid is the demand of a specific good in the market at a certain time period.
The word Ask in the Bid-Ask concept basically refers to the desire of a seller to give out his asset or good to a buyer at a certain price. Also in an economic sense, we can say the Ask is the supply of a specific good in the market at a certain time period.
With this basic definitions above, let's now understand what the Bid-Ask spread concept simply mean.
A bid-ask spread is the quantity at which the ask price surpasses the bid price for a commodity in the market. The bid-ask price can be defined in a mathematical sense by deducting the bid price from the ask price. This statement can be represented mathematically as shown below;
Bid-ask spread = AP - BP
Where AP stands for Ask Price and BP stands for Bid price.
In the bid-ask spread, a person will accept the bid price if he is ready to buy while a person will deliver the ask price if he is ready to sell.
The bid-ask spread is very important in the market because it serves as an indicator to alert the sellers at the price the buyer is willing to buy. It also alerts the buyers the price the seller wants to sell his commodities. If it happens that the difference between the bid and the ask is very small, then it indicates that the commodity is needed in the market(liquid market). So at this point, any trader who wants to either sell or buy a commodity in the market will be rest assure that his price level(buy or sell) will be executed in the shortest time period.
Likewise, if the difference between the bid price and the ask price is large, then it means that the demand of the commodity in the market is low(illiquid market). This indicates that both buyers and sellers are not willing to either buy or sell, thereby reducing the liquidity and demand of the commodity in the market.
The bid-ask spread also helps a buyer or seller to make the right decision when trading in a market. The buyer do not buy in a situation where the bid price is high, and the seller do not also want to sell in a situation where the ask price is lower.
A higher bid price means that the commodity at that particular time is costly and a lower ask price indicates that the commodity at that particular time is cheap in the market. So because both sellers and buyers do not want to make loss, the bid-ask spread helps them to make the best decision when carrying out a trade in the market.
a.) CALCULATE THE BID-ASK SPREAD.
b.) CALCULATE THE BID-ASK SPREAD IN PERCENTAGE.
As I already stated in question 1, the bid-ask spread is calculated by deducting the bid price from the ask price.
Mathematically represented as;
Bid-ask spread = AP - BP
Where BP stands for Bid Price and AP stands for Ask Price
a) In the question,
Bid price = $5 and Ask price = $5.20
Therefore, Bid-ask spread = $5.20 – $5 = $0.20.
Therefore, the bid-ask spread is $0.20
b) The Bid-ask spread percentage can be calculated by making use of this mathematical formula below.
% Bid-ask spread =(Bid-ask spread ÷ Ask Price) × 100
From question a), our Bid-ask spread was found to be $0.20 and the ask price wasb $5.20.
% Bid-ask spread= ( $0.20 ÷ $5.20) × 100
% Bid-ask spread = 0.0384615 × 100 = 3.846% (3 d.p)
a.) CALCULATE THE BID-ASK SPREAD.
b.) CALCULATE THE BID-ASK SPREAD IN PERCENTAGE.
We will be using the formulas I have already stated in question 3 in answering this question too. It's the same format and nothing new about this question. Let's see how this one too is calculated.
a) From the question,
Ask Price = $8.40 and Bid Price = $8.80
Bid-ask spread = $8.80 – $8.40
Bid-ask spread = $0.40
b) From a,
Bid-ask spread = $0.40 and Ask price = $8.80
%Bid-ask spread = ( $0.40 ÷ $8.80) × 100
%Bid-ask spread = (0.0454545) × 100 = 4.5455% (4 d.p)
Crypto X has higher liquidity than Crypto Y because the Bid-ask spread of Crypto X($0.20) is lower than the Bid-ask spread of Crypto Y($0.40) and also the percentage spread of Crypto X is lower than the percentage spread of Crypto Y.
Slippage is said to occur in a market if a trader earns a new trade execution price from what he initially planned. Slippage usually occurs in a market when there is a change in the bid-ask spread between a period a market order is placed and the period another trader fulfills the order.
Cryptocurrencies are very volatile indicating that their prices can change within the shortest time you can think of. Because of that, you can placed an order to buy an asset at a market price but by the time the other market maker will execute the order, the intended market price can change. When a situation like this happens, then a slippage is said to occur.
A slippage can be advantageous to a trader or it can bring loss to a trader again. So because of this, traders need to be extra vigilant and careful in order to avoid loss. I would be talking about the positive slippage and negative slippage with some price illustration to make it more understandable.
A positive slippage is said to occur when the placed order is executed at a market price which is more profitable and advantageous to the trader.
This basically means that the buyer would buy the asset at a market price that is lower than the intended market price he placed the order.
A seller too would sell his asset at a market price that is higher than the intended market price he put out.
Let's look at an example of a positive slippage below.
Assuming a buyer decides to place an order to buy USDT at a price of $100. But unfortunately the order got executed at $90. A slippage has occurred because the order was not executed at the intended price. In this scenario, a $10 positive slippage has occurred.
Also, assuming a seller decides to place an order to sell USDT at a price of $100. But unfortunately the order got executed at $120. A slippage has occurred because the order was not fulfilled at the intended price. In this scenario, a $20 positive slippage has occurred.
A negative slippage is said to occur when the placed order is executed at a market price which is unfavorable and at disadvantage to the trader.
This basically means that the buyer would buy the asset at a market price higher than the intended market price he placed the order.
A seller too would sell his asset at a market price lower than the intended market price he put out.
Let's take a look at an example of a negative slippage below.
Assuming a buyer decides to place an order to buy USDT at a price of $50. But unfortunately the order got executed at $55. A slippage has occurred because the order was not executed at the intended price. In this scenario, a $5 negative slippage has occurred.
Also, assuming a seller decides to place an order to sell USDT at a price of $200. But unfortunately the order got executed at $196. A slippage has occurred because the order was not executed at the intended price of the trader. In this scenario, a $4 negative slippage has occurred.
Bid-ask spread is very important and crucial to traders when carrying out trade. Traders need to
be extra careful in order to avoid loss whilst maximizing profit.
This lecture was really helpful and important as I learned a lot about the Bid-ask spread and slippage.
Thank you.