Steemit Crypto Academy [Beginners' Level] | Season 4 Week 1 | The Bid-Ask Spread
1. Properly explain the Bid-Ask Spread.
In a market or at a place where that is making an exchange, conveniently there are two parties; buyers and sellers. These parties always come up with their desired prices for the assets or the commodities before making a transaction. Both seller and buyer are willing to have more profitable prices for the exchange. Therefore, they negotiate and settle down their prices for tradable assets. When considering the parties, they come up with are two prices. They are Bid price and Ask price. According to the buyers’ side, the highest price that he/she promises to pay for the commodity is known as the Bid price. On the other hand, when it comes to the sellers’ side, the lowest price that he/she going to deal with their commodity or asset is known as the Ask price.
This Bid and ask prices are always performing where there is a negotiation and making deal with people over any object or any service that is granted. In cryptocurrencies, there is always a defined and finite frame for the exchanges. The market makers set a limited price for selling and buying orders. The difference value of these two prices is called Bid-Ask spread, which can simply be functioning with the subtracting of Bid price from Ask price.
2. Why is the Bid-Ask Spread important in a market?
Bid-Ask spread is an important parameter of the health of market assets exchanging or the balance between demand and supply. Term liquidity come up with this Bid-Ask spread. When sellers and buyers have a good negotiation space and a captivated willingness over fixing prices, the spread would be lesser and it can be more favourable to accept and execute the exchanges. It avoids mismatching and losses for both parties. When the difference of the spread is less, more trades can be accomplished and sellers can supply enough volume of commodities according to the buyers’ demand without any hesitation. When it is having a considerable gap between the Bid price and Ask price, the circulation of supplements may not occur properly and the flow of exchanges would be collapsed. Therefore, the measurement of Bid-Ask spread helps with the continuation of trades within the market ecosystem.
3. If Crypto X has a bid price of $5 and an ask price of $5.20,
a.) Calculate the Bid-Ask spread.
b.) Calculate the Bid-Ask spread in percentage.
Bid price = $ 5
Ask price = $ 5.20
Bid-Ask Spread = Ask price – Bid price
= $ 5.20 - $ 5
= $ 0.20
Percentage of spread = (Spread / Ask price) x 100
= ($ 0.20 / $ 5.20) x 100
= 3.846%
4. If Crypto Y has a bid price of $8.40 and an ask price of $8.80,
a.) Calculate the Bid-Ask spread.
b.) Calculate the Bid-Ask spread in percentage.
Bid price = $ 8.40
Ask price = $ 8.80
Bid-Ask Spread = Ask price – Bid price
= $ 8.80 - $ 8.40
= $ 0.40
Percentage of spread = (Spread / Ask price) x 100
= ($ 0.40 / $ 8.80) x 100
= 4.545%
5. In one statement, which of the assets above has the higher liquidity and why?
Bid-Ask spread is conversely related to liquidity. When considering the above calculations, the spread of $0.40 has lower liquidity than the spread of $0.20. therefore, the market of question number 3 may have a good flow of trading than the Question number 4 market.
6. Explain Slippage.
In a trade, buyers and sellers place their orders and execute them in a while. Within this time, the prices of orders can be changed due to the volatility of money. The difference in the price between the moments of making orders and executing is called slippage. The slippage can be rapidly fluctuating in the crypto market than the fiat market. Therefore, the slippage in the crypto market may be higher than in the fiat market. There are two types of slippages. They are,
- Positive slippage
- Negative slippage
7. Explain Positive Slippage and Negative slippage with price illustrations for each.
Positive slippage
In positive slippage, both buyers and sellers can have a profit from their placed orders. The positive slippage occurs in a buy order when a buyer placed his/her order at a higher bid price than the executing price.
Ex: in a trade, when a buyer placed an order for $200 but the executed price was $198 and then the buyer could have a profit of $2 from this trade.
The positive slippage occurs in sell order when a seller placed his/her ask price lower than the executing time.
Ex: in a trade, when a seller placed an order with $200, but the executed price was $202 and then the seller could have a profit of $2
Negative slippage
In a negative slippage, both buyers and sellers have to face a loss. A negative slippage occurs in a buy order when a buyer placed his/her order at a lower bid price than the executing price.
Ex: in a trade, when a buyer placed an order for $198, but the executed price was $200 and then the buyer had to face a loss of $2
When it comes to the negative slippage of selling order it occurs when a seller placed his/her order at a higher asking price than the executed price.
Ex: in a trade, when a seller placed an order for $200, but the executed price was $198 and then the seller had to face a loss of $2
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