Bid-Ask Spread Meaning
What Is Bid-Ask Spread and How It Is Calculated?
Bid-ask spread is the difference between the price that buyers are willing to pay for an asset and the price that is acceptable to the sellers.
The price of a digital asset is primarily determined by the actions of buyers and sellers. The bid price refers to the highest price that a buyer is willing to pay for a given cryptocurrency, whereas the ask price is the lowest price that a seller is willing to accept for the same asset.
The bid-ask spread is calculated by subtracting the ask price from the bid price. Let’s consider the following example:
Suppose you are interested in buying Ether and you find an ask price of $2,350 and a bid price of $2,345. In this case, you would have to pay the ask price of $2,350 to purchase Ether as this is the lowest price at which sellers are willing to sell.
If you were a seller looking to sell Ether, you would sell it at the bid price of $2,345 as this is the highest price that a buyer is willing to pay you. The bid-ask spread in this scenario would be $5, which is the difference between the ask and bid prices.
Why Do You Need to Know Bid-Ask Spread?
It is important to note that bid-ask spreads can vary depending on market conditions and trading volume. Higher trading volumes usually lead to narrower spreads, whereas lower trading volumes can result in wider spreads.
Moreover, the bid-ask spread is closely linked to liquidity, which refers to the ease of buying or selling an asset without affecting its price. When an order is placed, the buyer or seller is obliged to buy or sell their assets at the agreed price. A market that has a significant amount of liquidity typically results in a tighter spread. In general, heavily traded assets tend to have smaller bid-ask spreads compared to less traded assets.