Steemit Crypto Academy [Beginners' Level] | Season 4 Week 1 | The Bid-Ask Spread by professor @awesononso
Introduction
Greetings all crypto lovers around the globe, I'm happy it's season 4! It feels good to be back after the two weeks break. Today in my post I will be attempting the home work tasks by professor @awesononso , he did a perfect lecture on Bid-Ask spread, it was really a detailed lecture and well understood. Thank you for the lecture professor.
Home Work Tasks
1.Properly explain the Bid-Ask Spread
Ada wants to buy a fairly used Toyota Camry from Charles for 3000 steem, that's her budget and that the highest she has to offer. Charles selling price is 3500 steem, he won't bulge for anything less.
From the story above:
The Bid price
The highest price Ada can pay for the car is 3000 steem which makes it the Bid price which simply means how much any buyer is able to pay for any goods.
The Ask price
The lowest price Charles is willing to sell his car for is 3500, that's the Ask price. It's the amount the seller is willing to sell his goods.
The spread
The spread is the difference between the Ask price and the bid price, that means the difference between how much Ada is willing to buy and how much Charles is willing to sell.
The spread = Ask price (Charles price) - Bid price (Ada price)
3500 - 3000 = 500
The spread is 500 steem.
The Bid-Ask spread is the vacuum between the Bid price and the Ask price, below is the spread for steem/steem dollar
From the screenshot above the green side is the Ask side while the red side is the Bid side and from the arrow indicator in the screenshot you can see the Ask price, the bid price and the spread. The gap between the green side and the red side is the Bid-Ask Spread. The Bid-Ask spread in the image above is wide a bit which means there is no much liquidity in the market.
2.Why is the Bid-Ask Spread important in a market?
The Bid-Ask spread is important because it helps to make a good decision when buying and selling in the market, with the Bid-Ask spread you will be able to deduce when those buying and selling a particular commodity are readily available.
For example comparing this screenshot below and the one above in question one.
This is a screenshot of the spread for STEEM and TRX and from the spread we can see that the gap is not as wide as the spread of STEEM and SBD which means STEEM/TRX has more liquidity than STEEM/SBD , so if I'm a buyer or seller I will definitely goes for STEEM/TRX. I was able to come to that decision because of the information I got from the spread, that's is the major advantage of the spread.
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.
Solution
a) Spread = Ask price - Bid price
Ask price= $5.20
Bid price = $5
Spread = $ 5.20 - $5.00
Spread = $0.20
b) %Spread = (Spread/Ask price) x 100
Spread = $0.20
Ask price = $5.20
%Spread = (0.20/5.20) x 100
= 0.0384 x 100
%Spread= 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.
Solution
a) Spread = Ask price - Bid price
Ask price = $8.80
Bid price = $8.40
Spread = $8.80 - $8.40
Spread = $0.40
b) %Spread = (Spread/Ask price) x 100
Spread = $0.40
Ask price = $8.80
%Spread = (0.40/8.80)x 100
= 0.4545 x 100
%Spread = 4.545%
5.In one statement, which of the assets above has the higher liquidity and why?
The liquidity of crypto X is higher than crypto Y because crypto Y has more or wider Spread.
6.Explain Slippage
I want to buy a commodity that is worth 25 steem and I made order for the goods at 25 steem but because there are not enough people in the market selling the commodity I want to buy at that price, it took a while before my order was executed and because of the nature of steem, the volatility and price change by the time my order was executed the price of the commodity has changed to 25.5 steem, that's is a typical example of what slippage means.
Slippage is the alter of price of an order from its original bid and this most often happens in a wider spread because the liquidity is low and there are not many traders trading at that particular time.
7.Explain Positive Slippage and Negative slippage with price illustrations for each.
Positive Slippage
This can simply be explained as a favourable outcome of an alter price from its original bid. Let's say I want to buy goods of about 30 steem and I already placed the order but by the time the order was executed, it was executed for 29 steem. what a joy right?
The positive slippage in this scenario will be
30 steem - 29 steem = 1 steem
It's also vice versa to selling of goods. If I want to sell goods for 55 steem and when the trade was executed it was sold for 60 steem.
The positive slippage will be
60 steem - 55 steem = 5 steem.
Negative slippage
Negative slippage is the opposite of positive slippage, a loss is made for orders executed.
For example a order of 10 steem was made to buy a coin by the time the order was executed the coin was bought at 11 steem.
The negative slippage will be;
11 -10 = 1 steem
A selling order of a coin for 15 steem executed at 14.5 ,
The negative slippage will be;
15 - 14.5 = 0.5
Conclusion
Bid-Ask spread is a great way to make an informed decision when buying and selling in a market, however it comes with its own risk as slippage can also occur and you may encounter some loss while trading but proper understanding of Bid-Ask spread can helps to avoid some unnecessary loss.
