Crypto Academy / Season 4 / Week 1 / Beginners : The Bid-Ask Spread
Hello fellows. How are you all?
This is @aizazghumman, here I am going to share my homework post on the topic "The Bid-Ask Spread" given by respected professor @awesononso
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1 Properly explain the Bid-Ask Spread.
The process by which a buyer is willing to buy an asset at a higher price is called a Bid Spread.
The seller is willing to sell any asset at the lowest possible price. This process is called Ask Spread.
If we talk about Bid-Ask Spread, we can estimate it this way, The difference between the value of an asset sold at a lower price(Ask Price) and the value of an asset purchased at a higher price(Bid Price) is called the Bid-Ask Spread.
Bid-Ask Spread= Ask Price - Bid Price
2 Why is the Bid-Ask Spread important in a market?
As we have learned in detail about Bid-Ask Spread in the first question, And now we will talk about the importance of Bid-Ask Spread in any market. To know the importance of Bid-Ask Spread in any market, we must know the rules of supply and demand in the market.
The volume of assets present in the market is called supply and similarly, the value of assets in the market is called demand.
Bid-Ask spreads are a concept by which we can determine the liquidity and illiquidity of any asset. And this concept helps traders a lot in examining any market trend.
In a market where there is more supply and more demand, traders will be more inclined and this will be called the High Liquidity Market. In the high liquidity market, the difference between Bid Spread and Ask Spread is very small which is beneficial for traders.
And similarly, if we talk about the illiquidity market, the difference between Bid Spread and Ask Spread is very big and there is very little supply and demand and it is not a profitable market for traders.
3 If Crypto X has a bid price of $5 and an ask price of $5.20,
a.) Calculate the Bid-Ask spread.
b.) Calculate the Bid-Ask spread in percentage.
Crypto X has a bid price of $5 and an Ask price of $5.20 Calculate the Bid-Ask spread.
Bid-Ask Spread = Ask Price - Bid Price
Bid-Ask Spread = $5.20 - $5
Bid-Ask Spread = $0.2
Calculate the Bid-Ask spread in percentage
%Bid-Ask Spread = (Spread/Ask Price) × 100
%Spread = ($0.2/$5.20) × 100
%Spread = 3.846%
4 If Crypto Y has a bid price of $8.40 and an Ask price of $8.80,
a.) Calculate the Bid-Ask spread.
b.) Calculate the Bid-Ask spread in percentage.
Crypto Y has a bid price of $8.40 and an Ask price of $8.80, Calculate the Bid-Ask spread.
Bid-Ask Spread = Ask Price - Bid Price
Bid-Ask Spread = $8.8 - $8.4
Bid-Ask Spread = $0.4
Calculate the Bid-Ask spread in percentage
%Bid-Ask Spread = Spread/Ask Price) × 100
%Spread = ($0.4/$8.8) × 100
%Spread = 4.545
5 In one statement, which of the assets above has the higher liquidity and why?
Based on the calculation we have the result, Crypto X Spread value is $0.2 and Crypto Y Spread value is $0.4. As we have learned in the previous questions, the market is called High Liquidity Market based on the small difference between Ask Spread and Bid Spread. From this, we conclude that CryptoX is a high liquidity asset.
6 Explain Slippage.
As you know, the crypto market is volatile, Prices of cryptocurrency assets fluctuate very quickly, such as high in one minute and low in the next minute. Sometimes when people place an order at the market rate, the asset price will change during the placing order. If there is a positive change in the asset price, it is beneficial, and if there is a negative change in the asset price, then it would be a loss, Thus, fluctuations in the value of a cryptocurrency are called slippage
7 Explain Positive Slippage and Negative slippage with price illustrations for each.
As we already talked about slippage, So right now I will explain what is positive slippage and negative slippage.
Positive slippage is beneficial for the trader, When a trader places an order, that order will be executed better price due to positive slippage occur in the market right now I will explain how to buy positive slippage works in the market.
Buy Order Positive Slippage
For example, Crypto 'A' was ordered to be bought at $50 but due to sudden positive fluctuations in the market, the order is completed at $49.
$50 - $49 = $1
It means we have to save $1 due to positive slippage occurs in market when we are placing an Order.
Sell Order Positive Slippage
When a trader places a sell order, that order will be executed better price due to positive slippage occur in the market
For example, Crypto 'A' was ordered to be Sell at $60 but due to sudden positive fluctuations in the market, the order will be sold at $61.
$61 - $60 = $1
It means you have to make a profit of $1 extra due to positive changes in the market.
As we know when positive slippage occurs in the market then the trader takes a profit. similarly when negative slippage occurs in the market trader face a loss. I will explain how negative slippage affects your buy Order and sell Order.
Buy Order Negative Slippage
For example, Crypto 'Z' was ordered to be bought at $90 but due to sudden Negative fluctuations in the market, the order is completed at $91.
$91 - $90 = $1
it's mean you have to lose $1
Sell Order Negative Slippage
For example, Crypto 'Z' was ordered to be Sell at $60 but due to sudden Negative fluctuations in the market, the order will be sold at $59.
$60 - $59 = $1.
here also you lose $1.