STEEMIT CRYPTO ACADEMY [BEGINNER’S LEVEL] | Season 4 Week 1 | The Bid-Ask Spread.
1) Properly explain the Bid-Ask Spread.
The Bid-Ask Spread is the difference between the highest amount a buyer is willing to pay for a particular commodity on the market which is the bid price and the lowest price that a seller is willing to sell his/her commodity which is the ask price.
In graphs, the green side of the graph represents the Bid price side while the red wave express the ask price side therefore the space in between represents the Bid-Ask spread where the gap is too wide that means that market is illiquid because buyers are not readily available.
Where the gap is small that means the bid and ask prices are almost in the same range therefore the market is liquid as both sellers and buyers are readily available.
Therefore, the bid-ask spread would be the amount by which the ask price exceeds the bid price. This is also the same way it is calculated mathematically. One can define the Bid price as the highest price that a buyer is willing to pay for a certain commodity on the market. On the other hand the Ask price can be referred to as the lowest price a seller is willing to sell off a certain commodity.
The Bid-Ask Spread works on various markets like for stocks, forex trading and even on the crypto market as it is very useful.
Market Makers are used to limit orders on the market to facilitate liquidity as they provide the bid and ask price for the particular trades.
Where a market marker places a limit order to buy a coin gives the trade a bid price and where a market marker places a limit order to sell a coin gives the trade an ask price.
2) Why is the Bid-Ask Spread important in a market?
The Bid-Ask Spread is important because it determines the liquidity on the market. Liquidity can be defined as the ease with which assets and other commodities are traded on the market.
In instances where the Bid-Ask Spread is small the market is liquid therefore making the trade volumes high. However, where the Bid-Ask Spread is of such a huge difference the market becomes illiquid therefore the trading volume is low.
The Bid-Ask Spread is controlled by the forces of supply and demand. Supply refers to the availability of a commodity on the market while Demandrefers to the availability of people willing to buy a certain commodity on the market.
Where the demand and supply forces are in check and are balanced, then trades are easily executed because as the sellers are offering, there are already available buyers thus making the market liquid. In instances where the demand and supply forces are imbalanced the buyers are not readily available.
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) Bid-Ask Spread = Ask Price - Bid Price
= $5.20 - $5
= $ 0.2
Therefore, the Bid-Ask Spread is $0.2.
b) Bid-Ask Spread in percentage
= (Spread/Ask Price) x 100
=0.2/5.20 x 100
=3.85% (rounded off).
Therefore the spread percentage is 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.
b) Calculate the Bid-Ask Spread in percentage.
a) Bid-Ask Spread = Ask Price - Bid Price
= $8.80 - $8.40
=$0.4
Therefore, the Bid-Ask Spread is $0.4.
b) % Spread = (Spread/Ask Price) x 100
= 0.4/8.80 x 100
= 4.55% (rounded off)
Therefore the spread percentage is 4.55%.
5) In one statement, which of the assets above has the higher liquidity and why?
Crypto X has a higher liquidity than Crypto Y, because it has a smaller spread which shows that the market is liquid while Crypto Y has a bigger spread that points to an illiquid market.
6) Explain slippage.
Slippage refers to the price changes on the market between the time an order is initiated and when it is executed. Therefore, the intended price will be different from the price at execution of the order. The markets especially crypto are so volatile in that prices are always changing however they are more common where the Bid-Ask Spread in wide in Crypto markets.
7) Explain Positive slippage and Negative slippage with price illustrations for each.
Positive slippage is they type of slippage where the order is executed at a favorable price. In instances where one is buying, they will buy at a lower price than the intended price. Where one is selling, they will sell at a higher price than the intended price.
If the trader intended to buy a commodity A at $80 however, the price changes and she buys $76 that is a positive slippage and the slippage is $4.
If the trader intended to sell commodity B at $74 however the price on the market changed and she sold it at $80 then there is a positive slippage of $6.
Negative Slippage on the other hand occurs where an order is fulfilled at a higher price than the intended price. If one is intending to buy however, ends up buying at a higher price than intended then a slippage has occurred. If one selling and ends up selling at a lower price than the intended, then a slippage has occurred.
If one is intending to buy commodity A at $60 however ends up buying at $62 on fulfillment of the order, then a negative slippage has occurred.
In instances where one is selling commodity B at 50 however ends up selling it at $49 on fulfillment of the order then a negative slippage has occurred.