How to Calculate Slippage in Cryptocurrency: A Guide for Beginners

In the world of cryptocurrency, slippage is a very important concept to understand. When you are making a trade, there is always the possibility that the price will move in such a way that your order will not be filled at the price you want. This can result in losses if you are not prepared for it. 

In this article, we will discuss what is slippage in crypto and how to calculate slippage and what factors can affect it.

Slippage: Definition

Slippage occurs when the price of an asset moves between the time you place your order and the time your order is filled. This can happen for a number of reasons, but most often it is due to market conditions.

How do you calculate slippage in crypto?

When you are buying or selling a cryptocurrency, the exchange rate is the price that you will pay for each unit of currency. The bid-ask spread is the difference between the highest price that someone is willing to pay for a currency (the ‘ask’ price) and the lowest price that someone is willing to sell it for (the ‘bid’ price). The bid-ask spread can be used to calculate slippage.

Let’s say you want to buy Bitcoin on an exchange where the bid price is $11,000 and the ask price is $11,100. This means that there is a $100 spread between the prices. If you were to buy one Bitcoin at $11,000 and then immediately sell it at $11,100, you would incur a loss of $100. This is because you would have to pay the higher ask price when you bought the Bitcoin and then receive the lower bid price when you sold it.

In order to calculate slippage, you need to know the size of your trade in terms of both fiat currency and cryptocurrency. For example, let’s say you want to buy $500 worth of Bitcoin. To do this, you would need to divide the total amount of currency by the bid price: 500 / 11000 = 0.045455… This means that you would be buying 0.045455… Bitcoin.

Now, let’s say that the price of Bitcoin increases to $11,200 while you are in the process of making your trade. This means that the ask price has also increased to $11,300. When you make your trade at this new price, you will have paid more for your Bitcoin than you would have if you had made the trade at the original bid price of $11,000. The difference between the two prices is the slippage. In this example, the slippage would be: 11300 – 11000 = 300.

The size of your trade and the level of volatility in the market can both affect how much slippage you will incur when making a trade. If the market is very volatile, the prices of currencies can change very rapidly. You are more likely to incur slippage when making a trade. 

Similarly, if you are making a large trade, you are also more likely to incur slippage. This is because it will take longer to fill a large order at the best possible price.

Summary

Slippage is the difference between the price you expect to pay for an asset and the actual price that you pay. It can occur for a number of reasons, but most often it is due to market conditions. You can calculate slippage by using the bid-ask spread. The size of your trade and the level of volatility in the market can both affect how much slippage you will incur when making a trade.