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

predomina (63)Beginner[2,4,5,6,7]in SteemitCryptoAcademy • 3 years ago (edited)

INTRODUCTION

Hello guys,
I want to specially appreciate God almighty for yet another wonderful opportunity given to me to be a part of this amazing program. The season number 4 actually came with a lot of changes as expected and I am believing that there are lots of things in stock for us in this new season. Today I have attended the lecture delivered by our incumbent professor in the person of @awesononso where he taught on this amazing topic titled The Bid-Ask Spread.

Question 1: Properly explain the Bid-Ask Spread.

Before we go into explaining the term Bid-Ask Spread, lets firstly understand these terms individually.

Bid: When ever the word Bid price is mentioned, we know that this is a price associated with the buyer of an asset. In a more clear term, the Bid price of any asset is the highest price which the buyer of that asset is willing or ready to pay for that asset.

Ask: Similarly, whenever we talk about the Ask price we are referring to the price which is associated with the seller of an asset or commodity. So therefore, we can see Ask price as the lowest price in which the seller of the asset or commodity is willing or ready to sell the asset.

Having understood the difference between a Bid price and the Ask price, let's now relate it to our main focus which is the Bid-Ask Spread. Since we have seen above that their is a certain price in which a buyer or a seller is willing to buy or sell his or her asset. It's important to mention here that there is also a stage where there may be no agreement between the seller and the buyer. This means that the buyer is not ready to bend to the rules of the seller and the seller is not ready to bend to the rules of the buyer as well. At this point we have the Bid-Ask Speead. Both buyers and sellers are not into any kind of trading at this point. Everyone is just on his or her own. In summary Bid-Ask Spread is the space between the Bid-price and the Ask-price as seen in the screenshot above.

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

The Bid-Ask Spread is important in a market for some reasons but for the sake of this task, I shall be looking carefully at one basic reasons why it is important in the market.

First and foremost, it helps traders to understand when there is high liquidity in the market. We have established that liquidity talks about demand and supply I.e both buyers and sellers are ready and willing to perform transaction together due to the fact that the spread between them is very little. Morealso, if we observe clearly the screenshot in question 1 above we will notice a very large spread. The gap between the buyer and seller is very large and hence no transaction is taking place at this point. This will inform any trader involve about the liquidity in such an asset at that point in time.

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.

Solution
Given

The Bid Price = $5

The Ask Price = $5.20

(a)

Bid-Ask Spread = Ask price - Bid price

Bid-Ask Spread = $5.20 - $5

Therefore, Spread = $0.2

(b)

% Spread = (Spread/Ask price) * 100

% Spread = (0.2/5.20) * 100

% Spread = 0.0385 * 100

% 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.

Solution
Given

The Bid Price = $8.40

The Ask Price = $8.80

(a)

Bid-Ask Spread = Ask price - Bid price

Bid-Ask Spread = $8.80 - $8.40

Therefore, Spread = $0.4

(b)

% Spread = (Spread/Ask price) * 100

% Spread = (0.4/8.80) * 100

% Spread = 0.0455 * 100

% Spread = 4.55%

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

From the analysis and calculations performed above, the asset with the higher liquidity is the crypto X. This is because when we mention the word liquidity, we talk about a market scenario where both buyers and seller are not far from each other. In other words buyers are ready and willing to buy and also sellers are ready and willing to seller. This implies that the bid price is not far from the ask price. Hence there is a constant buying and selling taking place in the market. In the crypto asset X as we can see above the the Spread is not much just $0.2. That means there is no much distance between buyers and sellers as it is in the case of the crypto asset Y where the Spread is $0.4.

Question 6: Explain Slippage.

In the crypto world, traders are always faced with uncertainties. In other words crypto currency trading is something we can not predict completely. I may not be completely right but from my little experience and studies, I believe no one in the crypto world can predict 100% the price of an asset in the next 10 minutes. This is because crypto asset prices are volatile in nature. Now the term Slippage in the crypto world simply refer to a sceniaro where an order execute at a price which is quite different from the intended price. This occurs in both the buy side and the sell side. This means that you may place an order as either a buyer or a seller in a particular price, and before the order will be executed the price will change either to your favour as the buyer or the seller, and also it may not be to your favour. It's on that note that I will be explain the types of Slippages below for more details.

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

Positive Slippage: When there is a slight movement or shift in the price of an asset which happens to be in favour of the buyer or seller at that point in time, that is known as Positive Slippage. Let's consider the example below for more clarification of the concept.

If a trader wishes to buy (Bid side) XRP using the market order at a price of $2.53, and when this order was placed, there happens to be a slippage where the price shifted to $2.50, then you will agree with me that some money has been saved and hence it is to the favour of the buyer because he now have a little change from his initial budget. Therefore positive slippage will be $2.53-$2.50 = $0.3

Similarly, If a trader wishes to Sell (Ask side) XRP using the market order at a price of $2.50, and when this order was placed, there happens to be a slippage where the price shifted to $2.53, then you will agree with me that some money has been added to the seller hence it is to the favour of the seller because he now have extra money added to his initial budget. Therefore positive slippage will be $2.53-$2.50 = $0.3

Negative Slippage: When there is a slight movement or shift in the price of an asset which is not in favour of the buyer or seller at that point in time, that is known as Negative Slippage. Let's consider the example below for more clarification of the concept.

If a trader wishes to buy (Bid side) LTC using the market order at a price of $20.40, and when this order was placed, there happens to be a slippage where the price shifted to $20.43, then you will agree with me that some money has been added to the price of the asset and that has lead to loss in the side of the buyer beachse his budget has been tempered with. Therefore negative slippage will be $20.43 -$20.40 = $0.3

If a trader wishes to sell (Ask side) LTC using the market order at a price of $20.43, and when this order was placed, there happens to be a slippage where the price shifted to $20.40, then you will agree with me that some money has been removed from the initial budget that they seller was expecting as well. Therefore negative slippage will be $20.43 -$20.40 = $0.3

Conclusion

Sincerely, I must commend the professor for such an insightful lecture, I have really learnt a lot at the cause of this assignment task. Today I can clearly differentiate between Bid price and Ask price and also I have been able to learn what Slippage is all about. Thank you so much professor @awesononso as I look forward to learn more from you in the next assignment task.

Best Regards @awesononso

Written by @predomina

#awesononso-s4week1 #cryptoacademy #spread #steemexclusive #nigeria #krsuccess