Understanding the Spread: How it Affects Your Cryptocurrency Trading

Important Information for Traders. On cryptocurrency markets, prices are formed based on supply and demand. One of the key factors influencing the cost of your trades is the difference between the highest price buyers are willing to pay and the lowest price sellers are willing to accept. This difference is called the spread. For high-volume assets like Bitcoin, this indicator remains minimal, while less frequently traded coins show significantly wider gaps.

In addition to the spread, traders often encounter slippage — when the final price of your order differs from the initial quote. This is especially relevant during market volatility or when liquidity is insufficient. A good strategy in such situations is to split large orders into smaller parts.

How Prices Are Formed on Crypto Markets

When you buy or sell assets on an exchange, remember that market prices directly depend on the balance of supply and demand. However, this is not the only aspect. Trading volumes, market liquidity levels, your order type, and overall market conditions can all prevent an order from being executed at the planned price.

Each side in the market strives for the most favorable conditions. Buyers seek the lowest price, sellers — the highest. This competition creates a gap between them. Depending on how volatile and extensive the specific asset’s market is, you may face not only the spread but also price slippage. Understanding the basics of order book organization helps avoid many unpleasant surprises during transactions.

What Underlies the Spread Between Supply and Demand

The spread is the gap between the highest bid price (bid) and the lowest ask price (ask) in the order book. On traditional financial markets, such gaps are often created by specialized intermediaries — brokers and market makers. In crypto markets, however, the spread arises naturally from the difference between traders’ limit orders.

If you need to buy an asset instantly at the market price, you’ll have to accept the highest seller’s offer. Conversely, for quick selling, you’ll accept the lowest buyer’s price. The more assets are traded (the higher the volume), the narrower the spread usually is. Bitcoin and other liquid assets show significantly tighter gaps than rarely traded coins.

This is due to the large number of orders in the book. When there are few orders, the spread widens, leading to significant price fluctuations when closing large positions. Conversely, assets with millions of dollars in daily volume maintain a stable, narrow spread.

The Role of Market Makers in Forming the Spread

Liquidity is a critically important indicator for any financial market. On markets with low liquidity, you may wait hours or days for someone to fill your order. To prevent this, continuous supply and readiness to trade are necessary.

On traditional markets, brokers and market makers provide this liquidity by earning profits from the spread. A market maker employs a simple but effective strategy: simultaneously buying and selling the same asset. By buying at a lower price and selling at a higher one, they capture this difference.

Even a minimal spread can generate significant profits if many transactions are made throughout the day. Due to this competition among market makers, popular assets typically have a smaller spread. For example, a market maker might buy BNB at $350 and sell at $351. This one-dollar difference is their net profit. Every trader who wants to trade instantly must accept these conditions. For market makers, it means: they sell what they buy and buy what they sell.

Spread and Trading Volumes: The Connection Through Market Depth

To see the spread in action, simply go to any major crypto exchange and activate the market depth view mode. This feature is usually located in the top right corner of the chart. The depth chart visualizes the asset’s order book. The green line shows the sell offers, the red line shows the buy demand. Each line reflects the number of orders and their price levels.

The gap between these lines is the spread. It can be calculated: subtract the green (ask) figures from the red (bid) figures. As repeatedly noted, there is a direct relationship between liquidity and a narrow spread. Trading volume is the most reliable indicator of liquidity. Larger volumes generally mean a smaller percentage of the spread relative to the total asset value.

The popularity of certain cryptocurrencies and securities creates high competition among traders. They aim to profit precisely from this spread, constantly refining their orders to keep the gap as narrow as possible.

How the Spread Is Calculated in Percentage

To compare spreads across different assets, it’s necessary to calculate it as a percentage of the price. The simple formula is: ((Ask price – Bid price)) / Ask price × 100

Let’s consider a specific example. Suppose the ask price of an asset is $900, and the bid price is $895. The difference of $5 divided by 900, then multiplied by 100, results in approximately 0.56% spread.

Now compare this to Bitcoin, which has a spread of $3 at a price of about $40,000. In percentage terms, that’s only 0.0075%. Although the absolute spread of Bitcoin is smaller, it does not mean its relative spread is narrower. The percentage shows the real picture.

Assets with lower trading volumes usually have a larger percentage spread. This confirms our theory about the dependence of spread on liquidity. The smallest percentage spread is found in the most liquid assets. When executing large market orders on such assets, the risk of getting an unfavorable price remains minimal.

Slippage: When the Market Moves Faster Than You

Slippage is a common phenomenon that occurs during high volatility or when the market has insufficient liquidity. It manifests as the trade being executed at a price different from what the trader expected.

Imagine: you place a large market buy order expecting a price of $100. However, the market is not sufficiently liquid to fill your entire order at that price. The system has to move to the next price levels (above $100) until your entire order is filled. As a result, your average purchase price ends up higher than expected. This is slippage.

When you place a market order, the exchange automatically analyzes it and limits it within the order book. The system initially offers you the best available prices. But if the volume at those prices is insufficient, it expands the search to other levels. Ultimately, your order is executed at a price that may differ from the initial quote.

On decentralized exchanges and with automatic market makers, slippage is especially noticeable. During periods of instability or low liquidity of altcoins, the difference can reach 10% of the expected price.

Positive Slippage: A Rare Market Gift

However, slippage is not always worse than expected. Positive slippage occurs when market conditions unexpectedly favor you. If you placed a buy order and the price unexpectedly drops, you will acquire assets cheaper. Conversely, during a sale, the price may suddenly rise at the moment of your order.

This phenomenon is rare, but on highly volatile markets, it can sometimes be observed. It indicates that volatility is not always detrimental to the trader.

Protecting Against Slippage

Many decentralized platforms and automatic market makers (such as PancakeSwap or Uniswap) allow you to manually set an acceptable slippage level. This parameter determines how far the actual price can deviate from the planned one before the transaction is canceled.

Setting a low slippage level means your order will take longer to execute, or may not execute at all. Setting it too high creates a risk of front-running. Another trader or bot might set a higher gas fee and buy the asset before you. Then, this trader instantly creates another transaction to resell the asset at the maximum possible price others are willing to pay.

Practical Ways to Minimize Negative Slippage

Although avoiding slippage entirely is not always possible, there are several effective strategies to reduce it.

1. Split large orders into smaller chunks. Instead of placing one large order, divide it into several smaller ones. Carefully monitor the order book — try not to place orders that exceed the available volume at each price level.

2. Consider fees when trading on decentralized markets. On some blockchain networks, transaction fees can be very high, especially during network congestion. These costs can completely wipe out any profit you might gain from avoiding slippage.

3. Be cautious with low-liquidity assets. If you trade an asset with a small liquidity pool, even one of your trades can significantly impact the price. Several consecutive smaller trades will have a cumulative effect on subsequent order blocks.

4. Use limit orders. They guarantee that you will get the desired price or better during trading. Although execution may be slower, you will be assured of avoiding negative slippage.

Practical Conclusions

When trading cryptocurrencies, remember that the spread and slippage can alter the final cost of your trades. Completely avoiding them is usually impossible, but understanding these mechanisms allows for more informed decision-making.

In small orders, slippage and spread may be imperceptible. However, on large transactions, the average price per unit can be significantly higher than expected. A deep understanding of these processes is critical for traders working with decentralized finance. Without basic knowledge, you risk losing your funds due to unexpected price fluctuations and manipulations by more experienced market participants.