Slippage in crypto trading is the difference between a trade’s expected price and the actual execution price, often caused by market volatility and liquidity issues.
Understanding Slippage in Cryptocurrency Trading
Imagine initiating a trade at one price, only to have it executed at another. This discrepancy is known as slippage. It’s the gap between the expected price of a trade and the actual price at which it’s executed. In the fast-paced world of cryptocurrency, slippage is a common occurrence, often caused by rapid price movements or thin trading volumes.
How Does Slippage Occur?
Slippage happens during the lag between placing an order and its execution. Crypto markets are especially susceptible due to their inherent volatility and sometimes low liquidity. Here’s the formula for clarity:
- Slippage = Final Execution Price – Initial Market (expected) Price
When traders experience a better-than-expected execution price, we call it positive slippage. Conversely, when the execution price is worse, it’s termed negative slippage.
Primary Causes of Slippage
Two main factors contribute to slippage in the crypto realm:
- Price volatility: The crypto market’s youth means prices are highly sensitive. News, social media, supply and demand, plus regulatory changes can all cause swift price shifts.
- Low liquidity: Altcoins often lack the buyer and seller balance seen with more established coins like Bitcoin. This can lead to trades being filled at the next available price, not the expected one.
Traders must navigate these waters carefully, understanding that slippage can significantly impact trade outcomes.