Crypto Slippage And How To Avoid It
By CNBCTV18.com IST (Published)
Mini
When you buy cryptocurrency at an exchange, the price that you place the order is rarely the executed price. This difference between your expected price and the price at which the deal is closed is known as slippage.
Crypto markets are highly volatile. The price of a token can fluctuate wildly in a matter of minutes. In this article, we learn about one side effect of such volatility known as slippage, how it affects traders and what you can do to protect yourself from its harmful effects.
What is slippage?
When you buy cryptocurrency at an exchange, the price that you place the order is rarely the executed price. This difference between your expected price and the price at which the deal is closed is known as slippage.
Slippage is not limited to the crypto market. It is a concept that is borrowed from the forex and stock markets. However, owing to the volatility of digital assets, it tends to have a larger effect on crypto traders.
How does slippage work?
The time difference between the placing of the order and the execution of the order gives enough time for fluctuations in prices to occur. This fluctuation can be a result of increased demand, increased liquidity or some news that has caused a stir in the market.
In any case, the short gap between the order and its execution is enough for the token price to change, leaving the trader to deal with the consequences. While the prices don’t usually fluctuate enough to result in significant losses, slippage can have adverse effects when your trading volumes are high and every bit matters.
Kinds of slippage
1. Positive Slippage: This happens when the price of the token decreases by the time the order is executed. It ensures you get the asset at a lower price.
2. Negative Slippage: This kind of slippage worries traders. It occurs when the price of the token has increased between order placement and execution, lowering the buying power of your money.
Both kinds of slippages also apply when you sell tokens on an exchange.
The workarounds
Now that we know what slippage is, how it occurs and its types, let’s learn a few ways you can avoid slippage and the losses that come from it.
Move away from market orders to limit orders: Market orders will buy or sell tokens at the best available price. This type of order is usually executed immediately, but the price at which it is executed is not guaranteed. On the other hand, limit orders allow you to set the price at which you’re okay to buy or sell a token. Every major crypto exchange has the limit order option, where trades are automatically executed when your desired token is available at your desired price.
Use slippage tolerance: Slippage tolerance is a feature in some of the new crypto exchanges that allows you to set a percentage of slippage you can handle. If you’re okay with a 0.5 percent slippage, you can add that as slippage tolerance, and the order will go through if the slippage is below that. If not, the order will be automatically cancelled. This feature is essential when minute price changes matter or if you’re an arbitrage trader and the margins are already tiny.
Avoid trading during turbulent times: Whether a major announcement is around the corner, or the market is sentimental about a crash or some other happening, it is best to avoid trading. The added volatility could result in massive slippage and equally painful losses.
