Steemit Crypto Academy | Season 4 Week 1 | The Bid-Ask Spread by @swaylee
Introduction
Good day prestiged readers, I am Rasheed and here I will be presenting what I've learnt on the assignment below. We will be looking at the Bid-ask spread and we would also be doing a little calculation in the process of this lesson and I would make it as easy as possible for those who want to learn. Now let's get started.
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1. Properly explain the Bid-Ask Spread
Before going into the definition of a bid and also look into the definition of the asking price. First of all a bid price is the highest price which you the buyer is willing to pay for a good/service, while the asking price is the lowest price which the seller can sell that good/service to you. So as the name implies, the Bid-Ask Spread is the difference in between the bid price and the ask price. It can also be called the spread. Take for instance, I want to buy a snicker at $55 (bid price) and the sellers (asking price) is $59. The difference between them which would $(59-55)= $4 is the ask-bid spread. From this example we can see a hidden formula to get the ask-bid spread which is
Bid-Ask spread = Ask price - Bid price
2. Why is the Bid-Ask Spread important in a market?
It helps us determine the efficiency of the market. When the Bid-ask spread is small this implies that the market is more efficient and when the spread is wider it shows that the market is less efficient.
It's used to measure the liquidity of the market and the cost of transactions in the market. This enables us to know the best time to trade and the kind of orders that are to be placed.
3. If Crypto X has a bid price of $5 and an ask price of $5.20,
a.) Calculate the Bid-Ask spread.
Ask price- Bid price= Bid-Ask spread
$(5.20- 5.00)= $0.20
From the above calculation, we can see that Crypto x has a Bid-Ask spread of $0.20
b.) Calculate the Bid-Ask spread in percentage.
(spread ÷ ask price) x 100 = %Spread
(0.20 ÷ 5.20) x 100 = %Spread
0.03846 x 100 = 3.846%
4. If Crypto Y has a bid price of $8.40 and an ask price of $8.80
a.) Calculate the Bid-Ask spread
Ask price- Bid price= Bid-Ask spread
$(8.80- 8.40)= $0.40
From the above calculation, we can see that Crypto Y has a Bid-Ask spread of $0.40
b.) Calculate the Bid-Ask spread in percentage
(spread ÷ ask price) x 100 = %Spread
(0.40 ÷ 8.80) x 100 = %Spread
0.04545 x 100 = 4.545%
5. In one statement, which of the assets above has the higher liquidity and why?
Crypto x has a higher liquidity. This is because there is a low spread showing little different between the bid and asking price compared to that of crypto Y meaning crypto x has a more stable market
6. Explain Slippage.
Slippage from my understanding is a situation where you place an order and there is a slight delay in the order causing a slight or major change in price before the order is actually executed. A situation where the Bid/Ask price changes before the order is executed. In the Crypto market there are alot of fluctuations which can make or mar your profits. I've come across situations where one a cryptocurrency loses or gains up to 15% in a couple seconds so in the case of Slippage you would be lucky if it ends up being a positive Slippage and don't worry you would get to know what a positive Slippage is in the next section. I would advise you to trade in a situation where the spread is low meaning there is high liquidity that way the market is less volatile and there are little fluctuations in prices. By doing this the Slippage can be reduced.
7. Explain Positive Slippage and Negative slippage with price illustrations for each.
Positive Slippage
After knowing what slippage is, when we say something is positive meaning like a good thing. So you can practically guess what a positive slippage is. This is basically a situation where the slippage works in your favour. In this context I will be using two aspects of positive slippage which is positive slippage to the buyer and positive slippage to the seller. To the seller, a positive slippage would occur when: I sold my Steem at $0.56 and a Slippage occurs and it gets sold at $0.60, as you can see due to price fluctuations the Slippage worked to my advantage and there ended up being a positive slippage of $0.04.
Now to the buyer, a positive Slippage would occur when: I buy steem at $0.56, a slippage occurs and I end up buying steem at a price of $0.50, this means I get more Steem for the same amount of money with a positive slippage of $0.06.
Negative slippage
A negative Slippage occurs in a situation where the executed price doesn't favour the party either buyer or seller. Here there is a loss of some sort during the slight time difference. I for one experience this kind of slippage when I'm converting my SBD (steem dollars) to steem. There are also two aspects of negative slippage, to the buyer and to the seller. The seller experiences negative slippage when: I sell steem at the rate of $0.60 and during the slight time lag in executing the order it ends up getting sold at $0.54. The negative slippage here is $0.06.
The buyer experiences negative slippage when: I buy steem at $0.50 but my order gets executed at $0.57. Here there is a negative slippage of $0.07. It is considered negative because I lost in the process.
Conclusion
In this assignment, I was able to expand my knowledge alot on slippage, the spread, liquidity and the abled calculations and I hope I have been able to put it in the simplest and easiest way to understand for interested readers. I want to thank prof. @awesononso for this wonderful assignment and I will be looking forward to doing the next assignment.