Cryptocurrency enthusiasts and traders have several factors to consider. One of the bigger puzzles is slippage, which impacts the price one expects to get by trading a specific cryptocurrency. Users can avoid slippage concerns by choosing the correct trading platforms, although it remains crucial to be aware of its existence.
Understanding The Concept of Slippage
When one goes to trade cryptocurrency A for cryptocurrency B, there will be a conversion process between the two. A user expects to trade X amount of cryptocurrency A to receive Y amount of cryptocurrency B. It is a very simple process, yet the received value may not always meet expectations. That is due to slippage, which depicts the difference between the conversion rate you expect to get and the price you get once the order executes.
In most cases, traders can calculate the slippage cost on trades, preventing any unnecessary losses or discrepancies. However, the volatility of certain crypto assets makes this process a bit trickier. Unlike financial markets like stocks, bonds, or even precious metals, cryptocurrency markets trade 24/7. That also means the prices of assets – including cryptocurrency A and B – will constantly change, for better or worse.
If the price of either asset – or both – changes very quickly, the platform cannot execute the order at the price a trader may expect. These price swings can result in receiving more of cryptocurrency B than expected, but the amount can also be much smaller. It is a very conflicting situation for traders that often leads to dismay. Moreover, traders have a higher chance of facing negative slippage outcomes when dealing with crypto assets suffering from liquidity dips.
More specifically, the liquidity of a crypto asset – either cryptocurrency A or B – impacts overall trading slippage. If either currency lacks liquidity, the spread between asks and bids can be fairly wide. As such, an order can trigger substantial price changes, affecting the conversion rate. Although most crypto assets have sufficient liquidity to negate exceptional slippage, some illiquid currencies may yield higher trading discrepancies than others.
There are multiple ways for traders to calculate slippage and the impact on the outcome of a trade. One can express slippage as either a US Dollar amount or as a percentage. However, both need to be calculated, as one can’t figure out the percentage without knowing the US Dollar amount. That latter calculation is straightforward: subtract the expected price from the price you received during the trade.
Furthermore, the percentage is equal to:
(US Dollar amount of slippage divided by (limit price – expected price) x 100)
Even though it sounds like slippage would always be bad or problematic, that isn’t necessarily the case. Negative slippage will, of course, result in a worse price than expected. However, positive slippage means traders get a better price than what they initially expected or signed up for. Trades can go in either direction, but it can prove worthwhile to calculate slippage – in USD and percentage – regardless of the outcome.
Ways to Avoid Slippage
The most straightforward way of avoiding slippage is by picking the right trading platform. A trading solution like Margex will always guarantee the lowest slippage possible while protecting users from price manipulation and unfair liquidations. Additionally, Margex users can trade in privacy and benefit from attractive promotions when creating an account. The platform also has a 9.9% uptime, which is essential when letting users trade between different cryptocurrencies.
One cannot turn off the volatility or liquidity of specific cryptocurrencies on a whim, as those factors will always be present. However, with the help of trading tools like limit orders – rather than market orders – traders can limit their exposure to slippage. Although limit orders may take a while to execute, traders gain control over the price they get when the order goes through.
Using the optimal trading platform and limit orders are often all one needs to keep the impact of slippage to a minimum. There may still be some small price discrepancies, although traders will know that in advance. It never hurts to protect oneself from the ongoing volatility affecting all crypto markets and make the most of every trade.
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