Spread and slippage: how they affect your crypto trades

Introduction

Any trader in the cryptocurrency markets encounters phenomena that directly affect the final price of a transaction. This refers to the spread—the difference between the prices of buyers and sellers—and slippage, which occurs when the actual execution price of an order differs from expectations. These two mechanisms work together, determining how profitable your trade will be. Understanding their workings is critically important for minimizing unforeseen costs and increasing trading efficiency.

How the spread between demand and supply is structured

The spread is the difference between the highest bid price ( buyer's offer ) and the lowest ask price ( seller's request ) in the order book. In traditional financial markets, this difference is often created by specialized liquidity providers, while in the crypto space, the spread arises naturally due to the difference between the limit orders of participants.

If you want to make an instant purchase, you will have to accept the minimum ask price from the seller. For an instant sale, you must agree to the maximum bid price from the buyer. More liquid assets demonstrate a narrow spread due to the high volume of orders in the order book.

The relationship between liquidity and spread size

Highly liquid assets (such as a cryptocurrency pair on a well-known market) allow traders to execute large transactions without significant price changes. A tight spread is an indicator of a healthy market. In contrast, low liquidity leads to a widening of the spread, creating substantial price fluctuations when closing large positions.

The Role of Market Makers in Spread Formation

Market makers play a key role in maintaining liquidity. They constantly place opposing orders - buying at a low price and simultaneously selling at a high price. The difference between these prices becomes their arbitrage profit.

Imagine a scenario: a market maker buys a coin for $800 and immediately sells it for $801, locking in a spread of $1. When trading in large volumes, even such a small spread generates significant profit. Competition among market makers usually narrows the spreads for popular assets, and as a result, popular assets have smaller spreads.

How to Calculate Spread Percentage

The percentage ratio is used to compare the spreads of different assets:

Spread percentage = (Ask price − Bid price) / Ask price × 100

Let's consider an example with the meme coin TRUMP: with an ask price of $9.44 and a bid price of $9.43, the spread is $0.01, which equals 0.106%.

Now let's compare with BTC: the spread in $1 may seem larger nominally, but in percentage terms, it is only 0.000844%. This difference is explained by the fact that BTC is a highly liquid asset, while TRUMP has a lower trading volume. The percentage spread clearly shows: assets with low percentage spreads are significantly more liquid, which reduces the risk of overpaying when executing large orders.

What Happens During Slippage

Slippage is the phenomenon when a trade is executed at a price significantly different from what the trader expected. This usually occurs in markets with high volatility or insufficient liquidity.

Slip Mechanism

Let's say you place a market order to buy for $100. If the market is not liquid enough, the exchange will not find enough volume at that price and will automatically “pass” to higher prices in the order book until your order is fully filled. The average price of your purchase will be higher than $100 — this is called negative slippage.

When working with decentralized exchanges and automated market makers, slippage can be even more significant — sometimes exceeding 10% of the expected price, especially when trading low liquidity altcoins.

Positive slippage

There is also the opposite scenario. If prices fall while placing a buy order, or prices rise while placing a sell order, you experience positive slippage — a better price than expected. This happens rarely, but it is occasionally observed in volatile markets.

Slippage Protection: Practical Methods

Slip Allowance Setting

Many decentralized exchanges, including popular platforms like PancakeSwap and Uniswap, allow users to manually set the maximum allowable slippage in percentage terms. This is a “slippage resistance” mechanism.

However, it is necessary to find a balance: with too low a tolerance, the order may take a long time to execute or may not execute at all. With excessively high tolerance, there is a risk of front-running—faster traders or bots with higher gas fees will outpace you and close the position earlier.

Four ways to minimize slippage

1. Break large orders Instead of one large order, break it down into several smaller ones. Carefully study the order book and ensure that the size of each order does not exceed the available volume.

2. Consider network fees On decentralized exchanges, transaction fees can be significant, especially during high blockchain congestion. High fees can completely negate potential profits.

3. Choose liquid markets Low-liquid assets with small liquidity pools make your trading a significant factor in price formation. Trade on more liquid markets whenever possible.

4. Use limit orders Limit orders are executed only at the specified price or better. Yes, it will take longer to wait, but it is a reliable way to avoid negative slippage.

Market Depth Analysis

The market depth tool visualizes the order book. The red graph shows demand ( bid orders ), while the green shows supply ( ask orders ). The gap between them is the spread.

In highly liquid markets, the charts stretch and cluster closely together, indicating a narrow spread. In low-liquidity markets, there is a pronounced gap between the red and green curves — this signifies a wide spread.

Conclusion

Spread and slippage are inherent components of cryptocurrency trading. They are negligible for small trades but can significantly impact the cost of large orders. For traders operating in decentralized finance, understanding these mechanisms is critically important. A lack of knowledge about slippage or front-running can lead to substantial losses. By controlling the size of orders, choosing the right type of order, and understanding market liquidity, you significantly reduce the risk of unfavorable outcomes and optimize trading costs.