Crypto academy / season 4 week 1/ homework post for professor @awesononso/ bid-Ask spread

solar-star (65)Beginner[3,5,10]in SteemitCryptoAcademy • 3 years ago

Feels great to debute on this season's crypto academy. I really acknowledge the works the profs have all put in place to make this community an interesting place. I also want to commend @awesononso for such a great lecture on Bid-ask spread.

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Properly explain the Bid-Ask Spread

              Answer

In other to fully understand the concept of Bid-Ask Spread, I'll start with the basic definitions of bid price and ask price

what is bid price
Bid price simply means the highest price an individual is willing to pay for a commodity or an asset at a particular point in time.

E.g kunle is an apple seller, he sells his apple at a rate of $0.3 per apple. But a certain buyer is only willing to pay $0.2 per apple. The $0.2 the buyer is willing to pay is the bid price.

What is ask price
Ask price is simply the lowest price a seller is willing to accept for a commodity or asset at a particular point in time.

E.g James is a mechanic and wants to purchase a car's spare part at a price of $5, but the seller only wants to sell at $7. The $7 the seller wants to sell at, is the Ask price.

The difference between these two prices (the bid price and the ask price) is what is known as the Bid -Ask spread

Source
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Question 2

why is the Bid-Ask spread important in a market

             Answer

The bid-Ask spread is very important especially in a very volatile market like the crypto market as it enables the buyer to have the basic knowledge on how liquid a market is. This information will guide the buyer to know when the market is operating at a higher volume.

Another significant aspect of the spread is that it helps the buyer know when the market is favourable for business. A large spread poses a threat to the market as this indicates that the market volume is low. This means that most investors are not willing to throw in their money.
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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.

            Answer

Bid price = $5
Ask price = $5.20
Bid-Ask spread = Ask price - Bid price
Spread = $5.20 - $5 = $0.2

percentage spread = (spread÷Ask price)×100
= (0.2/5.20)×100
= 3.84%
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Question4

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.

            Answer

Bid price = $8.40
Ask-price = $8.80
Spread = Ask price - Bid price
= $(8.80-8.40) = $0.40

Percentage spread = (spread ÷ Ask)×100
= (0.4÷8.80)×100
= 4.53%
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Question 5

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

             Answer

Crypto X has the higher liquidity. This is due to the fact that the spread percentage of crypto X is much lower than that of crypto Y.
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Question 6

Explain Slippage.

            Answer

Slippage simply means the variation in the price of an asset at the time a market order is placed and when it is executed. This variation is common in the crypto maket due to its high volatility rate as the prices tends to keep changing continuously.

Crypto markets with low volatility tends to have a higher slippage rate compared to the liquid market. Hence therefore, its always advisable to set slippage tolerance rate on any transaction you wish to perform so as to mitigate the losses that may arise as a result of this. The default slippage tolerance for Uniswap is always set at 0.5%

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Question 7

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

POSITIVE SLIPPAGE
This is simply when an order is executed at a rate higher than the market order for a sell order.

E.g An order was placed on a certain coin to be sold at $80 but was subsequently executed at $85. The positive slippage is then calculated as;
$85 - $80 which is = $5.

When an order is executed at a rate lower than the market order for a buy order

E.g An investor placed an order for a certain coin at the price of $50 but the order was executed at $48.
The positive slippage will be = $50 - $48
= $2.

NEGATIVE SLIPPAGE
This is the direct opposite of the positive slippage. It is when an order is executed at a price lower than the market order for a sell order
E.g An order was placed on a certain coin to be sold at $100, but was subsequently executed at $100.5. The negative slippage is then calculated as;
$100.5 - $100 which is = $0.5.

OR
When an order is executed at a price higher than the market order for a buy order.
E.g An investor placed an order for a certain coin at the price of $40 but the order was executed at $40.5.
The negative slippage will be = $40.5 - $40
= $0.5.
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Conclusion
The knowledge of spread is very essential when it comes to trading of forex, this knowlegde will help a trader minimize his or her loss by knowing when liquidated or less.
The concept of slippage is also very essential for a buyer as this will help mitigate unnecessary losses.

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