Crypto Academy / Season 4 / Week 1 - Homework Post for @awesononso: THE BID-ASK SPREAD
Thank @awesononso, for your lecture. I have fully understood this concept of bid and ask, as well as the spread. Please permit me to do my homework here.
Answer to question 1
On a typical exchange platform or stock market, there are buyers and sellers. When a buyer wants to buy he bid for it, and when sellers want to sell they ask for a bid.
In a market situation, a bid is the current and highest price a buyer is willing to pay for that particular asset or stock. Conversely, the ask is the lowest current price for which the seller is willing to sell his asset or stock.
Thus, the bid-ask spread means the price quoted for the current highest bid price and the current lowest price. The spread is the difference between the bid and ask.
For instance, a bid-ask of $20/$20.8 has the has the order to buy the asset at $20 and an order to sell the same asset at $20.8. in this case, the spread is $20.8-$20 = $0.8.
The bid-ask spread can be used to determine the short term demand and supply of the chosen asset. It follows that if the bid is higher than the ask, the demand is high and if the ask is higher than the bid, the supply is high.
In either case, the price of the asset is high or low respectively.
Answer to question 2
The bid-ask spread is very important for decision making by both traders and investors. When we can analyze this tool, it becomes easy to decide what to buy and when to buy it.
Keeping an eye on the bid-ask spread can helps traders to know the direction of future movement of price for the asset. This will ensure that traders don’t enter trade at the wrong time.
Through analyzing the bid-ask spread, traders can avoid losses and maximize their profits.
Parameters for crypto X
Bid price =$5
Ask price =$5.20
a) Bid-ask spread =ask price – bid price
This will give us $5.20 - $5 = $0.20.
Thus, the bid-ask spread for crypto X is $0.20.
b) Percentage spread = (spread/ask price) x 100
This will give us ($0.20/$5.20) x 100 = 3.846%
Thus, the percentage spread for crypto X is 3.846%
Parameters for crypto Y
Bid price =$8.40
Ask price =$8.80
a) Bid-ask spread = ask price – bid price
This will give us $8.80 - $8.40 = $0.40
The bid-ask spread for crypto Y is $0.40
b) Percentage spread = (spread/ask price) x 100
This will give us ($0.40/$8.80) x 100 =4.545%
Thus the percentage spread for crypto Y is 4.545%
Crypto X has more liquidity because the bid-ask price is smaller ($0.20) compared to crypto Y which has $0.40 bid-ask spread.
In crypto markets, the word slippage simply means a situation where trade is executed at a price different from what was intended. For instance, if a buyer placed a bid for an asset at $70 and the trade was executed at $71, the slippage is that $1 difference.
Slippage exists because of the volatility of crypto assets in the market. Thus, no matter how fast the trade is executed, slippage can still occur.
Slippage can be either positive or negative.
A positive slippage is when the buyer or seller experience more profit from the trade. For example, if a buyer placed a bid for an asset at $64, but due to slippage the trade got executed at $63 the slippage was positive.
On the seller’s part, if he placed a ask for an asset to be sold at $43 but the asset got sold at $$44, there was a positive slippage.
A negative slippage happens when the price executes at a price that tends to make the buyer or seller lose some money.
For example, if a buyer place a bid for an asset to be bought at $23 but it got executed at $24, the slippage here is negative.
If a seller placed an ask at $51 but the trade got executed at $50, the slippage is negative.
In summary, slippage = Executed price – Bid/or ask price.
The crypto market is a busy place filled with buyers and sellers. It is important to understand that buyers can place any price as bid. Some investors place bid at a low price and wait for an execution in future, as a way of maximizing their profits. The same is true for sellers.
Thank you for reading.
Hello @princesstj,
Thank you for taking interest in this class. Your grades are as follows:
Feedback and Suggestions
You missed a major point in the second question.
There is also a point missing on the explanation of slippage.
Justify your work next time to improve the arrangement.
Thanks again as we anticipate your participation in the next class.