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Hello everyone,
I'm very grateful to be part of this new season "4" of the cryptoacademy. I'm very happy to be part of the week one of the beginner class anchored by our highly esteemed professor @awesononso where he explained some points that will be helpful in our crypto-trading under the topic: "BID - ASK SPREAD".

This post is structured based on the homework tasks given at the end of the Lecture as stated below:

• Properly explain the Bid-Ask Spread

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

• 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.

• 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.

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

• Explain Slippage.

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

WHAT IS BID - ASK SPREAD?

The term "BID-ASK SPREAD" is also know as THE SPREAD is the difference between the buy and sell price of the tradable coins in the Crypto-market. For instance, I want to buy steem in the market with my SBD at the bid price of $0.080915 while the seller offers his coin at $0.081800 as his asking price as shown below.

As shown above in the picture, There's a difference between the two prices. That's the spread. To get the actual amount/Difference. A formula will be adopted.

THE SPREAD = ASK PRICES - BID PRICES
0.081800 - 0.080915
Therefore, the spread will be $0.000885.

The spread can be narrower or wider depending on the Liquidity and trading volumes. Where there's more buyers and sellers, the spread will be narrow as they are ever ready to close any open trade in time as shown in the scenerio above while coins of low trading volumes have wider spread due to low liquidities and low market actors too.

However, In every market operations, there's always an interplay between the forces of demand and supply. This determine the potential prices at which the buyer wants to pay and the one the seller really asking for his coins as shown above. These two best prices influence the market transaction at that time. They are:

• BID PRICES
• ASK PRICES

BID PRICES
Also known as the buy prices and usually marked green in the market. it is the highest amount/prices that the buyer/investors are willing to pay for a coin in the market. No matter the price tag set by the sellers, every buyer and investors have a price at heart that he/she is willing to pay and can afford too. For instance in the above trade, where I was the buyer decided that the highest price to pay for steem will be $0.080915 as my bid in Difference with the asking price from the seller of $0.081800.

ASK PRICES
Also known as the selling prices. The lowest price at which a seller or supplier is requesting for the coin supplied in the market. The sellers or supplier stipulates this prices, not minding what the buyers thinks of it but based on the market forces. This section is marked red. In the instance above; the seller stipulated $0.081800 as his asking price!

THE IMPORTANCE OF BID-ASK SPREAD

The concept is highly important to everyone especially the traders in these ways.

1). Hidden costs:
As the spread represent the money for the market makers, knowledge of this will be helpful to traders to know how to minimize this costs in order to maximize profits.

2). Improve trading Strategies.
As the traders are benefits oriented, so they are after those trades with high liquidities and more gains, knowing that a narrow spread means that the coin is highly tradable with high number of traders too. Engaging in such trade will be profitable at a very short period.

With the knowledge of the impact of spread on the trade, a short time profits can be to cover the costs of the market makers( i.e, the spread). It will be wise to close the order when there's actual a profit for the trader aside of the transaction costs.

Since the bids represent the demands and ask for the supply, knowledge of the spread will be highly appreciated as one will know more about the market terrain as these forces determine the dynamic nature of the market as prices determinants.

1) if a Crypto X has a bid price of $5 and ask price of $5.20

A). Calculate the BID-ASK SPREAD?
B). Calculate the BID-ASK spread in percentage?

SOLUTIONS

USING THE FORMULA

A) THE SPREAD = ASK PRICES - BUY PRICES

= 5.20 - 5.00
= 0.20

THEREFORE THE BID-ASK SPREAD IS $0.20.

B). % SPREAD = (SPREAD/ASK PRICES) × 100

= (0.20/5.20) × 100
= 0.0385 × 100
= 3.85

THEREFORE, THE BID-ASK SPREAD IN PERCENTAGE WILL BE $3.85

2) if a Crypto Y has a bid price of $8.40 and ask price of $8.80

1). Calculate the BID-ASK SPREAD?
2). Calculate the BID-ASK spread in percentage?

SOLUTIONS

USING THE FORMULA

A) THE SPREAD = ASK PRICES - BUY PRICES

= 8.80 - 8.40
= 0.40

THEREFORE THE BID-ASK SPREAD IS $0.40.

B). % SPREAD = (SPREAD/ASK PRICES) × 100

= (0.40/8.80) × 100
= 0.0455 × 100
= 4.55

THEREFORE, THE BID-ASK SPREAD IN PERCENTAGE WILL BE $4.55

IN ONE SENTENCE, WHICH OF THE ASSETS ABOVE HAVE HIGH LIQUIDITY AND WHY

CRYPTO X HAVE HIGHER LIQUIDITY BECAUSE OF ITS NARROWER SPREAD OF $3.85 THAN CRYPTO Y WITH WIDER SPREAD OF $4.55 WHICH IS HIGHER IN VALUE OF $0.70.

SLIPPAGE

Due to the dynamic nature of prices and availability of traders at a given time, the execution of an order might occur at a different price from the intended price of the trader. When the Differences between the intended price and executed price occurs, we can rightly termed it as SLIPPAGE. It often happens and can be favourably or unfavorably occurance.
There are two classes of slippage. They are;

• POSITIVE SLIPPAGE
• NEGATIVE SLIPPAGE

POSITIVE SLIPPAGE

We can termed it POSITIVE SLIPPAGE Whenever the executed or new price is different from the intended price of the trader but on favourable outcome thereby resulting in his/her Advantages and profits. For instance; A trader wants to pay/sell for 10 steem. An order is placed but when executed, a slippage occurs and the order is executed with 11 steem for the trader. Since the slippage occurs at a favourable outcome for the trader, it is a positive slippage!

EXECUTED PRICE - INTENDED PRICE = PROFITS

11 STEEM - 10 STEEM = 1 STEEM

Since there's a profit and advantageous situation. It is a positive slippage.

NEGATIVE SLIPPAGE

Whenever the executed Price of the market orders from the trader occurs at the disadvantaged position from the intended price of the said trader and the trader suffers losses. Such slippage is negative! It often happens at a coins of very low liquidities that's categoried as having a wide spread Because there are few or little market participants at the given time. For instance; a trader placed an order at $31.7 and the executed prices occurs at $30.2.

EXECUTED PRICE - INTENDED PRICE = loss

$31.7 - $30.2 = $1.5

there's a loss of $1.5 which is unfavorably occurance to the trader. It is a negative slippage!

CONCLUSION

In a crypto trading, there's an interplay of the forces of demand and supply so that a trade can be transacted. The dynamic nature of the price of a tradable coins available in the market resulted from the difference between the market makers. Those market makers stipulates the prices at which coins are offered and willing to be sold out too. The activities of these important market makers are influenced solely by the forces of the demands and supply chain of the coin.

Slippage occurs often but mostly on tradable coins of low liquidities and volatile nature of the market prices. It can be favourable or unfavourable market operations which can be profitable/losses to the trader.