Steemit Crypto Academy [Beginners' Level] | Season 4 Week 1 | The Bid-Ask Spread | @tocho2

tocho2 (77)in SteemitCryptoAcademy • 3 years ago

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Hello Friends

This is my first participation in Steemit Crypto Academy, I really liked this experience with this first task and I want to continue with the following activities, and I hope I did well in this first opportunity.

1. Properly explain the Bid-Ask Spread.

I begin by saying that to be a "market" for products and services, there must be “Bid and Ask” for them. And to explain the relation between “Bid and Ask” I will do the following example:

If I am a buyer, I establish the "Bid" by expressing how much I am willing to pay for a product or service, this would be the most I can pay for something. But when we speak of "Ask" we refer to the minimum amount that a seller or trader would accept for his product or service. Therefore, for this product or service, the mathematical difference between “Bid and Ask” is called "Spread".

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

In itself we cannot talk about the importance of the Spread without mentioning the importance of the Bid and Ask, because the Bid and Ask are those that determine the prices that we observe of a certain product or service, then we can say, they condition the behavior of the market . Therefore, the Spread, which is the differential between the "Bid and Ask" is used as an economic indicator of liquidity in monetary and financial terms.

3. If Crypto X has a bid price of $5 and an ask price of $5.20

a.) Calculate the Bid-Ask spread.

This would be like this: Bid-Ask Spread = Ask - Bid
Spread = $5.20 - $5 = $0.20

b.) Calculate the Bid-Ask spread in percentage.

For the Bid-Ask percentage this is %Spread=(Spread/Ask Price)x100
%Spread = ($0.20 / $5.20)x100 = 3.84%

4. If Crypto Y has a bid price of $8.40 and an ask price of $8.80

a.) Calculate the Bid-Ask spread.

For this case Spread = $8.80 - $8.40 = $0.40

b.) Calculate the Bid-Ask spread in percentage.

And % Spread = ($0.40 / 8.80)x100 = 4.54%

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

The asset called Crypto X presents higher liquidity because the gap between Bid and Ask is small compared to Crypto Y.

6. Explain Slippage.

The slippage phenomenon occurs when an order is placed in a market with little liquidity, where the gap between Bid and Ask is very high, so the operations are placed at a desired price but due to the large margin or gap mentioned above, these operations close at a price very different from the one initially requested. In this slippage phenomenon we must consider an aspect of great relevance which is volatility. The “volatility” of monetary assets and crypto assets is what generates sudden and rapid changes in the prices of these assets, so we will always find a margin of difference between the offer price and the final purchase or closing price, and This is what we know as "slippage".

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

The Slippage is determined taking into account the expected prices for the purchase and sale operations, because it is measured based on the initial price of an operation (buy or sale) and the final price at which this operation has closed, and in this we can say that there are two types of Slippage

Case of Positive Slippage: this is observed when the buy transaction closes at a significantly lower price than the expected initial price. And the sale operation closes at a higher price than the one foreseen for this operation.
Case of Negative Slippage case: we can anticipate that this is the opposite of the previous case, because if it is a buy operation, it closes at a higher amount than expected, which is unfavorable. And in the case of a sale operation, it closes at a price much lower than the amount initially planned for this operation, which is also unfavorable.
Examples:

.- Imagine that you place a buy operation for an asset called "LemonTree" and you have placed it at a price of 10 USD, but the final closing price is 5.25 USD, it is observed that the closing price is significantly lower than the price expected initial, so this is a Positive Slippage. 10 USD - 5.25 USD = 4.75 USD positive Slippage.

Now, let's consider the same asset "LemonTree" and a buy order is placed for the same 10 USD, but the final closing amount is 12 USD well above the initially expected amount; now we are facing a case of Negative Slippage, where 12 USD - 10 USD = 2 USD of negative Slippage.

.- Now let's consider a sale operation of an asset called "GreenApple" for an amount of 8 USD and the final closing amount of this operation is 9.15 USD, given that the closing has been done for a higher amount, we would be talking about a Positive Slippage of 1.15 USD.

And if we take this same asset "GreenApple" for a sale operation equal to 8 USD, and the closing price of said operation is 6.30 USD, we would be facing a Negative Slippage of 1.70 USD, an amount a little lower than the expected.

With this assignment I have recalled that it is very important to take into account that all foreign exchange and financial operations markets work based on supply and demand, so it is always necessary to take into account liquidity, volatility, and the different indicators economic that can affect any financial operation.

Task developed for Steemit Crypto Academy [Beginners' Level] | Season 4 Week 1 | The Bid-Ask Spread

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