What is Slippage in Crypto?
When trading, market participants usually intend to execute a trade at a specific price. However, sometimes the actual price in a trade is slightly different from their specified price. This is due to an occurrence called price slippage, which can occur due to a delay between an order’s processing and its execution.
In crypto markets, price slippage refers to the difference between a cryptocurrency asset’s requested price and the actual price at which the trade is executed. It typically occurs due to rapid price shifts or low market volume and liquidity.
(Slippage = Final Execution Price – Initial Market (expected) Price)
The slippage is considered positive when the trade gets a more favorable rate than the one they placed. For example, if they buy an asset for less than their desired price, or if they sell their asset for more than their expected sell price. Negative slippage occurs when the final execution price is less favorable than the one a trader initially placed.
What Causes Price Slippage in Crypto?
While slippage can occur in any market, including stocks, it is more prevalent in the cryptocurrency market. The primary causes in the crypto market are price volatility and low market liquidity.
- Price volatility: The crypto market is known for its high volatility. Due to the infancy of the crypto market, factors such as social media hype, demand and supply forces, regulations, and investor sentiment can contribute to the rapid price changes. The fast-changing nature of crypto prices makes the orders prone to slippages.
- Low liquidity: Most altcoins have fewer willing buyers and sellers (or an imbalance between the two) compared to Bitcoin, which translates to low liquidity. When an exchange (especially a decentralized exchange) has insufficient volume to fulfill an order at the expected price, it executes the order at the next best price.