What Is Slippage In Crypto?

Last updated 02/01/2022 by

Summary:

Slippage is the difference between the expected and actual cost paid for an order of cryptocurrency. Slippage occurs both when the actual price of your order is higher or lower than expected. While slippage is often unavoidable, there are a few helpful tips to reduce the slippage in your cryptocurrency orders.

As in all investments, there are risks involved when buying cryptocurrency —one of them being slippage. Slippage is a frustrating problem many crypto investors face. While it may not be possible to completely avoid slippage in a volatile market like crypto, there are steps you can take to minimize its impact on your investments. In this article, we will explain slippage and smart practices to protect yourself from it.

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What is slippage?

In the simplest terms, slippage is the difference between what you think you pay when you purchase crypto and what you actually pay. Let’s run through an example:

You want to purchase Bitcoin. The current Best Ask on a given exchange (or expected price for 1 Bitcoin) is $10,000, and you want to place a $50,000 buy order. You would expect 5 Bitcoins. However, Bitcoin is volatile at the moment you purchase it. The price for a Bitcoin rises in the time between when you place your order and the time when the broker receives your order. By the time your order goes through, your $50,000 was enough to only purchase 4.7 bitcoin, instead of the expected 5.

In this example, you experienced negative slippage. Slippage is the expected percent difference between the quoted and executed prices on your crypto order. Depending on the exchange and broker, instead of receiving less crypto for a given buy order (as in the scenario illustrated above) the actual amount you pay might be different. (Brokers include sites like crypto.com or Coinbase.)

Here’s another example:

You place an order for Widget Coin. You purchase 50 units at $10, expecting to pay $500. However, by the time the order has gone through, the price of Widget Coin has dropped to $9.50. You end up paying $475 for 50 units.

In this example, you experienced positive slippage because the cost was lower than you anticipated. Slippage often occurs in small increments, most commonly at 0.05% to 0.10%. However, during periods of extreme volatility, slippage may get as high as 1%.

What causes slippage?

Slippage can occur in any market and is the result of several factors. However, it often occurs as a result of one of two reasons:

A change in the bid-ask spread between the time a trade is placed and the trade is filled.
Insufficient order book depth (the number of price levels available at a particular time) to support large market orders.

A change in the bid-ask spread can lead to positive or negative slippage

In volatile markets like crypto, a change in the bid-ask spread is common. In fact, slipping due to a change in the bid-ask spread is almost inevitable. However, sometimes this slippage can work to your advantage. A change in the bid-ask spread can lead to either positive or negative slippage.

Positive slippage: Positive slippage occurs when the price of crypto falls, increasing your buying power. For example, you purchase 100 units at $5 (paying $500), but the price of the crypto falls, so your order goes through at $4.5 per unit. You received a more favorable trade.
Negative slippage: Negative slippage occurs when the price of crypto increases, decreasing your buying power. For example, you purchase 100 units at $5 (paying $500), but the price of crypto rises, so your order goes through at $5.5 per unit. You received a less favorable trade.

Insufficient book order depth

An order book’s depth is the number of shares available at a certain price point. The “deeper” an order book, the less likely a large market order will shift the price. However, larger orders are likely to face higher slippage because there is insufficient bid volume. In this case, the order will be “split” into smaller orders at different prices, where the orders execute at the next best price.

For example, say you place an order for 1,000 units at $12. Your large order might be split into three different orders and you end up paying $12 for 500 units, $12.04 for 350 units, and $12.06 for 150 units. The larger the order, and the more volatility in the market, the more likely slippage is to occur.

What makes crypto so susceptible to slippage?

Cryptocurrency markets are known for weaker market depths and extreme price volatility, which is why slippage is such a common problem for crypto traders. As there are thousands of transactions every hour in the crypto market, cryptocurrencies constantly fluctuate in price.

Crypto is also a hot-ticket item at the moment and is receiving attention from prominent figures and companies, such as Elon Musk and Tesla. This means that news coverage of crypto is constant, affecting the popularity of the market. Prices are likely to change drastically anytime there is breaking news about the market.

Coins also are only as valuable as the amount someone will buy and sell them for. Without a reference point, the value of coins always fluctuates.

What is slippage tolerance?

While slippage may be inevitable, there are ways to minimize its impact. Luckily, the majority of crypto brokers have a slippage tolerance control. This means that you can “set” the level of slippage you are willing to tolerate and the broker will not fill orders outside this threshold. For reference, a typical level of tolerance is less than 0.10%.

How do you stop slippage in crypto?

It is important to realize that slippage cannot be stopped in crypto. If you chose to invest in crypto, you will almost certainly experience slippage at some point. It is inevitable in this volatile market! Nevertheless, there are ways to control slippage beyond utilizing the slippage tolerance control on brokers.

For starters, breaking large orders into small chunks is a smart strategy for minimizing slippage. However, this strategy warrants a few considerations. First, most brokers have a transaction fee. If the transaction fee is high, you may lose more money from multiple micro-trades than you gain from avoiding slippage. Also, any trade affects the demand for swapping two tokens. For large orders for a token with low liquidity (or small market cap), you can significantly move the price, making it more expensive for yourself.

Also, it goes without saying, but consider avoiding trades during volatile periods. While volatility is impossible to avoid completely, especially in the crypto market, there are periods of less volatility, such as in the early afternoon or on Tuesday and Wednesday.

Slippage and investing in Crypto

As you start to invest in crypto, understanding slippage and the mechanisms for control is a great first step in making smart investment decisions. Crypto is a volatile market, and it comes with many risks, but there are also rewards to look forward to.

Key Takeaways

Slippage occurs when you pay less or more than expected for cryptocurrency.
Cryptocurrency brokers may help reduce your slippage, but they also require a fee.
You can reduce the amount of slippage that occurs by watching out for news stories on cryptocurrency or breaking one large order into multiple small orders.
Some slippage is usually unavoidable in the cryptocurrency market.

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