Crypto Academy / Season 4 / Week 1 - Homework Post for Prof. @awesononso

Good Evening everyone,

It's so good to be here again. It is another season in steemit crypto academy and am so happy to be one of the participants in this new week. I have read and understood the topic that was tutored by Prof. @awesononso this new season 4 week 1, "The Bid-Ask Spread". Below, I will be attending to some questions which were obtained from the class and I will be answering the questions without wasting our precious time. Follow me as take you on the journey.

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Questions

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• 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.

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Answers

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Properly explain the Bid-Ask Spread.

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There is always Bid and Ask price in the market which is the highest price the buyer is ready to buy the commodity and the lowest price the seller is willing to sell a commodity. Bid in the crypto market stands for the demand made by the buyer. While the Ask refers to or stands for supply for a particular asset.

Demand/Buying and Supply/selling which can also be referred to as Bid and Ask price normally happen in the cryptocurrency market because that is mostly what trading is all about. The cryptocurrency bid and ask spread is said to be the difference between the highest market price a buyer is ready or willing to purchase a particular asset or commodity and the lowest price the seller is willing to sell or accept from the buyer.

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Bid and ask price as never be of the same price because both parties want to sell and buy at a price that will earn them profit. As we can see in the above image, the green represents Bid, red represents Ask while the gap in between the two is Bid-Ask Spread.

As we all know from the lecture received from Prof. @awesononso. BId-Ask spread can be of two sizes. Which is either small or widespread. If it is small, it shows that there is a good number of limited orders from both buyer and the seller. But, if the spread is wide, it signifies that there are only a few limit orders on both sides, which are the buyer and the seller.

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

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Bid-Ask Spread is a concept that is very important to know by traders mostly to carry out very good trades to avoid loss. Knowing this concept is a good advantage because it has reasons why it is important. Some of which I will be explaining below.

Bid-Ask spread can be used in the market, to determine liquidity. Liquidity or liquid market can be defined as the process whereby goods such as commodities, stocks, currencies, and so on. can be traded without stress. I.e. when there are enough buyers and sellers to carry out the trades with ease.

So, the liquidity can be determined in a way whereby if the spread between bId-Ask is small, that means the market is liquid because there is many limit order in the market and the volume also will be high. But, if there is a widespread between Bid and Ask, that means the market is not liquid but illiquid.

Another importance of Bid-Ask spread is that the spread can be a special guide on the type of order to place because if the spread is small, traders can purchase at the best price of the market order but if the spread is wide, the limit order will be a better choice. However, Bid-Ask spread both small and wide can help traders to know the direction of market movement.

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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.

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Calculating the Bid-Ask Spread. As indicated in the above question and the following question, I will be calculating the question using the below formula.

Spread = Ask price -Bid price

And also in percentage.

%Spread = (Spread/Ask Price) x 100

Answer

(A)

Ask Price = $5.20
Bid Price = $5

Spread = Ask Price - Bid Price

= $5.20 - $5
Spread = $0.2

(B)

%Spread = (Spread/Ask Price) x 100
= (0.2 ÷ 5.20) x 100
= 0.0385 x 100
= 3.85%

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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.

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(A)

Ask Price = $8.80
Bid Price = $8.40

Spread = Ask Price - Bid Price
= $8.80 - $8.40
Spread = $0.4

(B)

%Spread = (Spread/Ask Price) x 100
= (0.4 ÷ 8.80) x 100
= 0.0455 x 100
= 4.55%

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

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Crypto x is the asset with higher liquidity. This is because it has a smaller Bid-Ask spread in two formulas. Which is both spread amount and in percentage than crypto Y asset.

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Explain Slippage.

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As we all know that cryptocurrency is very risky, the market can turn out to be in favor of the trader while it may also go against the plan made by the trader. That is why it is always advisable to always trade or invest an amount of capital one can avoid losing.

The word slippage is a common thing that normally happens during trades. This is when a trader agrees or makes an order during a trade and the order was not filled as planned. I.e. the order could be filled in the favor of the trader while it may also be against the trader's plan. I.e. The order will be filled at a different price.

Slippage mostly occurs when there is low liquidity. I.e. a wide Bid-Ask spread. Slippage can simply be defined as the difference between the expected price in which a trader is expecting and the price in which the order is being filled. However, slippage does not only occur in cryptocurrency but also all market venues. Such as bonds, futures, equities, and so on.

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

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• Positive Slippage -

This type of slippage is said to be positive when an order is filled in the favor of a trader. A positive slippage occurs in a trade for a buy order when an order is filled at a lower price than the planned price. While for a sell order, positive slippage happens to occur when a sell order is fulfilled at a higher price than the intended market price.

For Example,

If a trade is placed by crypto X to be bought at $150 and the order was filled at $147, so, the positive slippage will be $150 - $147, which gives us $3. That gives us a positive slippage of $3

Also, if a trade is placed by crypto X to be sold at $140 and it happens to be sold at $145, so the positive slippage will be $140 - $145, that gives us a positive slippage of $5.

• Negative Slippage -

A negative slippage normally occurs when the market did not go in favor of a trader. For a buy order, this is when an order is filled at a higher rate than expected. For a sell order, this is when an order is filled at a lower price than intended.

For Example,

If a trade is placed by crypto Y to be bought at the rate of $200 and it was later executed at the rate of $200.50, our negative slippage will be $200.50 - $200, which will give us = $0.50.

Also, if an order is placed by crypto Y to be sold at the rate of $200, it was now filled at the rate of $190.7, our negative slippage will be $200 - $190.7, which will give us = $0.3.

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In conclusion, Bid-Ask spread is a concept that should be known by all traders because it can be of help to traders in many ways such as, determining liquidity, knowing the direction of the market, and so on.

I want to use this medium to appreciate my amiable lecture, Prof. @Awesononso for this wonderful topic. It is a beginning of a new season and also the beginning of learning new things for me. Thank you so much. The lecture has added to my knowledge. Thanks for reading through my homework.