Crypto Academy / Season 4 / Week 1 - Homework Post for [@awesononso]||The Bid-Ask Spread||

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Introduction

The long awaited season 4 of the CryptoAcademy is finally here.It is another period for us to learn about crypto and crypto trading.
I hope to continue learning and expanding my horizon in the crypto space.Thank you @awesononso for the this wonderful class.

Question One

Properly explain the Bid-Ask Spread

Most of us here,do buy and sell.We buy goods,food items, clothing and other things.The seller will always tell the buyer a price,and the buyer will have to bargain at a price usually lower than the price mentioned by the seller.There is always the lowest(minimum)price that the seller can sell his goods(Ask price) and there is also a maximum price that the buyer can pay for the goods(Bid price).

The difference between the Ask Price and the Bid Price is called the Bid-Ask Spread.

Let me further explain Bid-Ask Spread with an example.👇

Let's assume Sevilla fc wants to sell a player called Kounde to Chelsea.

•Sevilla fc will announce that the minimum amount that they will sell Kounde is £70,000,000 and nothing less.This £70,000,000 is called the Ask price.

•Chelsea fc wants to pay a maximum of £65,000,000 for Kounde and nothing more.This £65,000,000 is the called the Bid price.

Now,the difference between the Ask price of £70,000,000 and Bid price of £65,000,000 is called the Bid-Ask Spread.
Bid-Ask Spread=£(70,000,000-65,000,000)=£5,000,000.

Whenever the difference between the ask price and the bid price is very small,it means that the trading volume would be high because the seller is pegging the price at almost the price that the buyer can readily pay.Such market is said to be Liquid.
On the other hand,if the difference between the ask price and the bid price is very far apart,it means that the trading volume would be very low because the seller is pegging the price at a price where the buyer cannot easily pay.Such market is said to be Illiquid.
In summary,a small Bid-Ask Spread suggests a liquid market(high trade volume) while a large Bid-Ask Spread suggest an Illiquid market(low trade volume).

My Steemit wallet

From the SBD/STEEM chart above ,you will notice the gap between the ask price and bid price is very large.This means that the trading volume would be low and it would result in an illiquid market.

Binance.com

From the ADA/BUSD chart above,you will notice that the gap between the ask price(red) and the sell price(blue) is very small.This means that the Trading volume would be high and it would result in a liquid market.

Question Two

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

If I budgeted to buy a pair of shoes at $50 and the seller says that the minimum price he will sell is $50.1
It means the trade can easily happen because the ask price is almost the same as the bid price.However,if the seller has set a minimum sell price of $120 for the shoe,it would be almost impossible for me to buy.
Whenever the ask price is closer to the bid price,the trading volume will increase because more transactions will happen but if the difference between the ask price and sell price is too much,the trading volume will decrease because only a few or no transaction would take place.

The importance of the Bid-Ask Spread is that it helps a trader to make informed decision as to know whether there is a high or a low trading volume.If the Bid-Ask Spread is much,it means that the market will experience a low trading volume .It means that there is low bid and ask price and so the market becomes Illiquid(supply and demand are miles apart).

On the other hand,If the Bid-Ask Spread is low,it means that the market will experience a high trading volume .It means that there is high bid and ask price and so the market becomes liquid(supply and demand are almost equal).

In summary,the Importance of the Bid-Ask Spread is that it helps a trader to understand the market trend, whether there is a high trading volume (liquid) or low trading volume (Illiquid) market.

Question Three

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:
Bid Price=$5.0
Ask Price=$5.2

a.) Bid-Ask Spread=Ask price - Bid price

=$5.2 - 5.0=$0.2

b.)% Spread=(Spread/Ask Price)x100

=(0.2/5.2)x100
=0.03846 x 100
=3.846%

Question four

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:
Bid price=$8.40
Ask price=$8.80

a.) Bid-Ask Spread=Ask price - Bid price
=$8.80 - $8.40=$0.4

b.)% Spread=(Spread/Ask price)x100
=(0.4/8.80)x100
=0.04545 x 100
=4.545%

Question five

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

Crypto X has a higher liquidity because it's spread($0.2) is smaller than the spread($0.4) of Crypto Y.

Question Six

Explain Slippage

Cryptocurrency market is a very volatile market which means that price of an asset can change in just a few seconds.One could see the price of BTC to be at $60,000 after one minute or less,it can change to $58,000.This is why the price cryptocurrency is not %100 predictable.No one can predict it in absolute terms.

There are times i would placed an order(market order) on Binance,before I could complete the transaction,the price has changed within seconds.It happens on Steemit wallet too.This changes in price(up or down) is due to the fact that cryptocurrencies are volatile.
This difference or change in price from the intended price to the execution price is called Slippage.Slippage could be favorable to the buyer or the seller or vice versa.
For example,If I place a buy order of 1 BTC at $60,000 and it got executed at **1 BTC for $58,000,i would be very happy because I got a positive (favourable) slippage.But,if it got executed at 1 BTC for $ 62,000,it would be a negative slippage I won't be happy.

In a nutshell the difference in price at the point of placing the order and at the point of execution of the order is called Slippage.

Question Seven

Explain Positive Slippage and Negative slippage with price illustrations for each

Slippage is the difference in price between the intended price and the execution price.A Slippage could be favourable or less-favourable.

•Positive Slippage:
These happens when an order is filled at a very favourable price to both the buyer and the seller.It's just like buying a product a low price or selling your product at high price.We have positive Slippage for both buy order and sell order.

Positive Slippage (for Buy Order)-This is when a buyer places a buy order at a given price and the the buy order was executed at a lower price.For example,I placed a buy order of STEEM at 1 and it was executed at $0.6.I would be very happy with that.
Positive Slippage=$(1.0 - 0.6)=$0.4

Positive Slippage (for Sale Order)-This is when a seller places a sell order at a given price and the the sell order was executed at a higher price.For example,I placed a sell order of STEEM at 1 and it was executed at $1.4.I would be very happy.
Positive Slippage=$(1.4 - 1.0)=$0.4

•Negative Slippage:
These happens when an order is filled at a less-favourable price to both the buyer and the seller.It's just like buying a product a high price or selling your product at low price.We have negative slippage for both buy order and sell order.

Negative Slippage (for Buy Order):
This is when a buyer places a buy order at a given price and the order was executed at a price greater than the intended price.For example I placed a buy order for BTC at $20,000 and it got executed at $25,000.I will become angry.

Negative Slippage=
=$(25,000 20,000)=$5000.

Negative Slippage (for Sell Order):
This is when a seller places a sell order at a given price and the order was executed at a price lower than the intended price.For example I placed a sell order for BTC at $20,000 and it got executed at $16,000.I will become angry.
Negative Slippage=$(20,000 - 16,000).

In summary,a Positive Slippage favours both buyers and seller while a Negative Slippage is less-favourable to both buyer and seller.

Conclusion

The Bid-Ask Spread or Spread is used to determine whether the market is experiencing a high trading volume(liquid) or a low trading volume(Illiquid).When the spread value is less,it means a liquid market whereas when the spread value is much,it means an Illiquid market.
The difference in price between the point of initiating a trade order and the point execution of the order is called slippage,it could be positive or negative.