What is Slippage in Crypto and How to Minimize Its Impact

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26 Jun 2023

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If you have ever traded cryptocurrencies, you might have noticed that sometimes the price you pay or receive for your order is different from the price you see on the screen. This difference is called slippage and it can affect your trading results positively or negatively.

In this article, we will explain what slippage is, what causes it, and how you can minimize its impact on your crypto trading.

What is Slippage in Crypto?

Slippage is the difference between the average purchase or sale price for a trade and the initial selling or market price. Slippage refers to the changes in the presiding price of an asset in the course of the execution of a trade request.

For example, let’s say you want to buy 10 ETH at $4,000 each on a crypto exchange. You place a market order, which means you want to buy at the best available price in the market. However, by the time your order is executed, the price of ETH has increased to $4,050 due to high demand and volatility. This means you end up paying $40,500 for 10 ETH instead of $40,000. Your slippage is $50 per ETH or 1.25%.

Slippage can also work in your favor. For instance, if you want to sell 10 ETH at $4,000 each and by the time your order is executed, the price of ETH has dropped to $3,950 due to low demand and volatility. This means you end up receiving $39,500 for 10 ETH instead of $40,000. Your slippage is -$50 per ETH or -1.25%.

Slippage can be calculated as follows:
Slippage = (Average Execution Price - Initial Price) / Initial Price * 100%

What Causes Slippage in Crypto?

There are two main factors that cause slippage in crypto: liquidity and volatility.

Liquidity refers to how easily an asset can be bought or sold without affecting its price. The more liquid an asset is, the more buyers and sellers there are in the market, and the less slippage there is. The less liquid an asset is, the fewer buyers and sellers there are in the market, and the more slippage there is.
Volatility refers to how much an asset’s price fluctuates over time. The more volatile an asset is, the more its price changes rapidly and unpredictably, and the more slippage there is. The less volatile an asset is, the less its price changes rapidly and unpredictably, and the less slippage there is.

Some examples of factors that affect liquidity and volatility in crypto are:

Market size: The larger the market size of a crypto asset, the more liquid and less volatile it tends to be. For example, Bitcoin has a larger market size than Dogecoin, so it has less slippage than Dogecoin.
Trading volume: The higher the trading volume of a crypto asset, the more liquid and less volatile it tends to be. For example, Ethereum has a higher trading volume than Litecoin, so it has less slippage than Litecoin.
Order size: The larger the order size of a crypto trade, the more slippage it tends to cause. For example, if you want to buy 1000 ETH at once, you will likely move the market price up significantly and incur more slippage than if you want to buy 10 ETH at once.
Order type: The type of order you use for your crypto trade can also affect slippage. For example, a market order will execute your trade at the best available price in the market regardless of slippage, while a limit order will execute your trade only at a specific price or better that you set.

How to Minimize Slippage in Crypto?

While slippage is inevitable in crypto trading due to its inherent nature as a decentralized and dynamic market, there are some ways you can minimize its impact on your trading results:

Choose a liquid and reputable exchange: A liquid exchange will have more buyers and sellers for any given crypto asset, which means less slippage. A reputable exchange will also have better security and customer service, which means less risk of hacks, scams, or delays that can cause slippage.
Choose a less volatile and more stable asset: A less volatile asset will have less price fluctuations, which means less slippage. A more stable asset will also have less risk of sudden shocks or crashes that can cause slippage. For example, stablecoins like USDT or USDC are designed to maintain a stable value and have less slippage than other cryptocurrencies.
Use limit orders instead of market orders: A limit order will allow you to set a specific price or better for your trade, which means you can control the maximum slippage you are willing to accept. A market order will execute your trade at the best available price in the market, which means you can incur more slippage than expected.
Split your large orders into smaller ones: A large order will have more impact on the market price and cause more slippage than a small order. By splitting your large order into smaller ones, you can reduce the slippage per order and average out the overall slippage.
Trade during less volatile times: The crypto market is open 24/7, but it can have different levels of volatility depending on the time of day, week, or month. By trading during less volatile times, you can avoid sudden price movements and spikes that can cause slippage. For example, weekends and holidays tend to be more volatile than weekdays and regular days.

Conclusion

Slippage is a common phenomenon in crypto trading that can affect your trading results positively or negatively. It is caused by liquidity and volatility in the crypto market, which can vary depending on the market size, trading volume, order size, order type, and time of trading of a crypto asset.

By choosing a liquid and reputable exchange, a less volatile and more stable asset, using limit orders instead of market orders, splitting your large orders into smaller ones, and trading during less volatile times, you can minimize the impact of slippage on your crypto trading.

I hope you found this article helpful. If you have any questions or feedback, please let me know.😊