What Is Slippage in Crypto?
|— When you buy cryptocurrencies, you may have to pay more than you were originally expecting, and the difference between these two prices is slippage.|
— Slippage in crypto varies depending on the blockchain, platform and assets you’re acquiring, so it’s imperative to know how to calculate it and make a choice wisely.
— Although slippage is inevitable while crypto trading, there are several things you can do to avoid paying more than you’re comfortable with.
If you’ve ever bought cryptocurrencies or any other kind of asset for that fact, you may have encountered slippage. It’s a concept that affects all kinds of markets, and cryptocurrency is no exception.
If that sounds foreign to you, let’s start with an example. Imagine you’re all set to make a trade, but when you hit that button, the price you end up paying is different from what you expected. That difference between the expected and actual price is what we call slippage.
While it may be commonplace, if you’re serious about crypto trading, it’s a significant factor to consider. No one wants to pay more for an asset than the price it was advertised at. And having to factor it in may change the way you transact. To explain, slippage across different blockchains and platforms varies greatly.
You might be wondering, can I avoid it? Well, the simple answer is; yes. But truly, the best method of avoiding slippage is first to understand it.
So, what is slippage in crypto exactly, and why does it even happen in the first place?
Let’s dive in.
What Is Slippage in Crypto?
Slippage in crypto trading refers to the difference between the expected and actual outcome of a trade. Essentially, it occurs when a trader fills an order at a different price than anticipated, leading to either losses due to market fluctuation during execution. As a trader, this is a crucial concept to understand as it can negatively affect your profits.
But before we dive into how it works in practice, what are the causes for crypto slippage in the first place?
Why Does Slippage Happen?
Ultimately, slippage is caused by market conditions. But that’s barely scratching the surface of why slippage really occurs, so let’s take a look at some of the main causes:
Of course, market volatility seriously affects the price you pay for a cryptocurrency. The coin’s price experiences ups and downs, even as you trade. Unfortunately, this means it impacts the execution of your trade. For example, say you agree to buy a coin at a certain price, but by the time your transaction goes through the coin has become more expensive. The difference between the expected and actual price is slippage. In highly volatile markets, rapid price fluctuations can lead to more substantial slippage, making it important for traders to be mindful of market conditions before making their trades.
Low Market Liquidity
Low market liquidity is another factor that contributes to slippage. To understand exactly how this works, let’s first consider a less crypto-native example.
Say you want to buy 20 cupcakes from a cake market. You go to the first stall, and see that they have all 20 cupcakes at $2 each, so you expect to pay $40 dollars. However, in the time it takes you to hand over the cash for all 20, someone buys five of them. So now you only have 15 cupcakes and need five more, so you go to the next stall on the market. They only have 2 cupcakes and they are $3 each, so you buy these and move on to the next stall. The final stall has only 3 cupcakes, which luckily is all you need, but they cost $5 each. In the end, it means you spend $51 instead of the initial $40 you were expecting to pay.
In our example, the cake market is just like the cryptocurrency market. If there’s not enough liquidity on the platform when buying cryptocurrency, slippage may become a problem. It’s a simple technical issue of needing the assets right then and there to execute the requested function.
Another cause of slippage in crypto is network congestion. To understand how this works, picture a busy road border between countries. If there are lots of cars trying to cross the border, the staff at the border can only let each car through as quickly as humanly possible. However, at its busiest times, this could cause delays.
Similarly, blockchains can only process transactions so fast, and they are processed in a queue. Thus, if everyone is transacting at once, your transaction may take a while to go through. This means at the point it’s processed the price may be significantly different—another slippage cause to watch out for.
How to Calculate Crypto Slippage
So now you know why slippage happens. But what about calculating slippage? Put simply, estimating your potential for slippage is essential for any crypto trader. So, if it’s so important, how do you do it?
Well, firstly, you have to find the difference between the current market price and the executed trade price. For example, if you bought 1 token at $1,000 but it filled at $800, the slippage would be $200.
Another useful metric is the slippage percentage. You can find this by dividing the price difference by the current market price. In the case of our example, the slippage percentage would be 20% (200/1,000). Aside from calculating slippage yourself, there are various tools and resources available to help traders estimate slippage across different chains while taking network congestion into account. Many of these slippage calculators are also freely accessible, using live market data to gauge potential execution costs.
Using these calculators will give you a good idea of trades to plan, and whether to avoid certain trades or platforms entirely.
How to Avoid Crypto Slippage
So now you know all about what slippage is and how to calculate it. But what about trying to avoid it entirely? Reducing slippage is key to improving trading performance and navigating the cryptocurrency market effectively. So, let’s dive into some of the ways you can avoid slippage cutting into your crypto profits.
Placing limit orders stands as a highly effective method to avoid slippage. To explain, a limit order allows you to specify a particular buying or selling price you’re happy with. This kind of buy or sell order will only execute when at that specific price. This guarantees the outcome you desire, sidestepping any nasty slippage surprises.
Stop Losses are also a popular method of minimizing potential slippage. Setting a stop loss order restricts the price movement before an order executes. In short, it won’t allow you to execute a trade if the price fluctuates too much. This lets you take charge of your trades and curtails the risk of significant losses caused by slippage.
Automated trading systems are also an excellent way to reduce slippage. To explain, they use advanced algorithms to monitor the markets and execute trades much quicker than a human could when favorable conditions arise. Using this method cuts out the potential price movement caused by human hesitation. Instead, the bot executes a trade quickly and effectively using the initial instructions.
Analyze the Crypto Market
Finally, you can limit your losses due to slippage by monitoring market conditions. By staying informed about news and events that may impact the market, you can adjust your orders accordingly to avoid unexpected price changes and minimize potential losses. Of course, this is not a fail-safe method, as unprecedented congestion could cause havoc on your trades.
Slippage Across Different Blockchain Networks and Platforms
As you know, there are multiple causes of crypto slippage and almost as many ways to avoid it. However, did you know slippage can vary significantly across different cryptocurrencies and exchanges?
Each cryptocurrency has its own level of liquidity and volatility, which directly impacts slippage. For instance, popular cryptocurrencies like Bitcoin are more stable, and therefore tend to have higher liquidity and lower volatility. This results in less slippage during trades. On the other hand, smaller altcoins often have lower liquidity and higher volatility, leading to more slippage.
But slippage doesn’t just vary on the networks themselves, they also vary on the platforms using them. To explain, it’s important to research the specific exchange you plan to use, as slippage can differ from platform to platform.
For example, with centralized exchanges, the depth of an exchange’s order book and trading activity will influence the slippage user’s experience. Plus, using these types of platforms, you don’t get to use a non-custodial wallet, meaning you forfeit ownership of your assets to a centralized entity. That said, centralized exchanges offer limit orders when most decentralized exchanges do not, meaning you can put a cap on the amount of slippage you’re comfortable with.
In the decentralized exchange world, platforms like Uniswap and PancakeSwap operate without a regulatory authority. This means they rely purely on the liquidity in the system for executing trades, and as a result, are more susceptible to low liquidity risks. Typically though, decentralized platforms have default slippage rates ranging from 0.5% to 1% and then traders can customize their slippage tolerance according to their preferences. Plus, these platforms don’t have the same types of centralization risks as centralized exchanges, so you can transact with more confidence in the network’s security.
Wherever you choose to buy crypto, you will likely experience slippage and there is no one-size-fits-all approach.
Slippage is Just One Aspect of Crypto Trading
So, to ensure your safety during trading, it’s crucial to grasp the concept and significance of slippage. By calculating the difference between the current market price and the executed trade price, you can evaluate potential gains or losses. Then to minimize slippage, there are various strategies you can implement.
Through Ledger Live, you can buy cryptocurrencies while estimating your slippage rates, and with absolute confidence of your assets’ security.
Because—remember— while slippage is a vital aspect of crypto trading, it’s just one piece of the puzzle. Always DYOR and make well-informed decisions. Building knowledge and acting with that in mind is imperative to safeguard your investments. By following these practices, you’ll be well-equipped to thrive in the dynamic world of cryptocurrencies.