What is a Slippage in Crypto?

As we said earlier, slippage is the difference between the price you think you’ll pay for an asset and the price you’ll actually pay for it. Slippage is a regular occurrence in the crypto-currency world because these assets are extremely volatile. Even Bitcoin, a crypto-currency that is very well known by the public and held by many, can see its prices rise and fall at a rapid pace, this is what we call volatility.

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When you trade crypto-currencies you have a price in mind you know you want to buy at such and such a price. Except that slippage will always be present in order to change your plans because this sector evolves very quickly. You need to learn how to control this variable in order to succeed in your investments.

Slippage occurs in the crypto-currency world because of two different issues. Firstly, there is the volatility of crypto-currencies and secondly, the lack of liquidity of some crypto-currencies.

How does slippage work?

Slippage in the crypto-currency world is a phenomenon that can happen when an asset is bought or sold. The market price can change quickly, so it is possible that you want to resell a token at a price X but during the transaction there are no more buyers at that price because the crypto-currency will have fallen or risen during that time. The slippage can be favorable or unfavorable depending on the amount of money spent and the number of crypto-currencies received.

Positive slippage:

Slippage is positive when you offer crypto-currencies for sale or when you buy them.
When you buy, slippage is defined as positive when you spend X amount of money but get back more crypto-currencies than expected.
When you sell it, slippage is defined as positive when you receive more money than you expected for the amount of crypto-currency you sold.

Negative slippage:

Slippage is negative when you offer crypto-currencies for sale or when you buy them.
When you buy, slippage is defined as negative when you spend X amount of money but get back less crypto-currency than expected.
When selling, slippage is defined as negative when you receive less than you expected for the amount of crypto-currency you sold.

Why slippage occurs in cryptocurrency trading

Slippage is an event that can be encountered due to two main reasons which are volatility and liquidity.

Regarding volatility. This is an event that can happen when the market prices change regularly. Having many players trying to speculate in the crypto asset markets. Because of this, it is possible to see crypto-currencies go back and forth every day, and see a price increase by 10% in a few hours.

As for liquidity. This is something that can regularly happen when you are dealing with a very thinly traded asset. We will face supply that is different to demand which can create very sudden price changes. The same is true for crypto-currencies which are very rarely bought for cash. This creates crypto-currencies that are locked into their own perimeter ecosystem and this can cause big price swings when an actor wants to sell that crypto-currency.

Let’s say a player buys a not-so-well-known crypto-currency that very rarely sells on the market. He buys it for $10,000 and gets back 100,000 assets at that price. The player will keep his crypto-currency aside on his app or on his ledger. After 7 months, he realizes that the asset has increased by 10% so he has earned $1000. He decides to resell all the crypto-currency he has, i.e. 100,000 assets for $0.11 each. This will allow him to recover $1000 profit as expected.

Unfortunately as the crypto-currency is very little bought against money, dollars, the actor will see his sale order at $0.11 pending. One day a buyer will propose a buy order at $0.07 each in order to buy back cheaper assets. Here we have two possibilities : the actor will lower his price or the actor will leave it at the same price. Let’s say the seller lowers his order to $0.07, we will see the price of the crypto-currency collapse compared to the last days. You have just seen an example explaining the liquidity problems of a crypto market.

Crypto Slippage Examples

We will illustrate slippage so that you can better understand this phenomenon.

Firstly the purchase:

You decide to buy $20,000 worth of Bitcoin to get 1 BTC. If you get the amount of 1 BTC we will have no problem, we are dealing with neutral slippage. On the other hand, if you get 1.05 BTC for $20,000 we are in a positive slippage because you will have acquired more crypto-currencies than you want and you are therefore in profit. Finally, if you receive 0.95 BTC when you have spent $20,000 you are in a negative slippage because the price will have made you lose.

Second, the selling:

You decide to sell 15 LTC to get $1500. If you get the amount of $1500, we have no problem, we are dealing with a neutral slippage. On the other hand, if you get $1550 for 15 LTC we are in a positive slippage because you will have acquired more money than you wanted and you are therefore in profit. Finally, if you receive $1045 for 15 LTC you are in a negative slippage because the price will have made you lose.

How to calculate slippage

In order to calculate the value of a slippage, you should already choose its unit of measurement. The %, the currency or the crypto-currency. Most of the platforms that you will be able to use will use the %, so we will explain to you how to calculate the slippage that you have suffered in order to understand the value of your gains or losses.

In order to calculate the percentage of slippage. You must divide the dollar amount of the slippage by the difference between the price you were hoping to acquire and the possible execution price

The calculation is as follows:

% Slippage = [ $ of splitting / ( Limit price – Expected price ) x 100 ]

What is Slippage Tolerance?

The slippage tolerance is expressed as a percentage. It is the amount of money you are willing to pay in addition to the price you are buying. Most trading platforms will allow you to select your slippage tolerance. If your platform does not offer this, you should know that the tolerance is usually between 0.1 and 2%. If you have any questions about this range, please contact the platform you are using to get clear information on how to minimize your loss when buying your assets.

Let’s say you want to buy ETH at $1,500 a piece and you put in a $100 tolerance. Your buy order will be canceled if the ETH exceeds $1600 over the period.

The notion of tolerance is very important because the crypto-currency markets evolve very quickly. You have to take this tolerance into account because you can lose a lot if you are not careful.

On popular crypto-currencies like ETH and BTC you will almost always have buyers and sellers at the market price but you still have to be careful because a sudden rise or crash can happen quickly.
On less popular crypto-currencies you have to be careful with offers to buy or sell because a large movement of funds can cause the crypto-currency in question to fluctuate dramatically.

How to Avoid Slippage

Unfortunately, slippage is impossible to avoid, but there are some tips that will help you avoid it.

To begin with, we advise you to activate the slippage limits on your platform so that you always have an eye on the % you can lose when buying.
Secondly, we advise you to buy during off-peak hours to avoid all the changes that can occur during the day.
Thirdly you can also use an option called stop limit. The purpose of this option is to set a maximum buy or sell price. This way, you will never be surprised to buy too high or sell too low again.
Fourth, we recommend investing in popular crypto-currencies that have high liquidity. This will provide you with a certain level of security. In addition, it is best to invest in projects that are fairly stable with a certain number of people following the project.
Fifth, we recommend that you read and learn about the news related to the crypto-currency you want to buy. Crypto-currencies like stocks see their price correlate with the news related to it. We therefore recommend that you do not place sell orders during events that may disrupt the stability of the price
Sixth, you can also go through crypto-currency resellers who will keep fixed rates for a certain period of time that they will update every hour. These resellers do the trading with the help of distributors. They can buy and resell different kinds of crypto-currencies. These dealers are flourishing in all four corners of the world.
Finally, we recommend you to not be afraid to use limit orders. These orders take more time but they allow you to be sure to pay the crypto-currencies at the desired price and not to be disappointed because rushing can sometimes be dangerous.
By following all of these tips you will reduce the loss that can be caused by slippage. It is still important for you to remember that the crypto-currency environment is very volatile and there is always a risk when you invest in this environment.

Don’t forget that the best thing to do when you’re not sure is to ask around and above all to be patient so that you never make bad decisions

Bottomline

It is important to consider slippage because it is something that will follow you every time you have to buy or sell crypto-currencies. It is therefore best to educate yourself in order to get a good handle on the subject.

There are ways to reduce slippage in order to better understand your buying and selling. We strongly recommend that you use these parameters to your advantage so that you are never taken by surprise. Now that you have all of this information, try to use it to your advantage to maximize your crypto-currency buying and selling.

All information provided on this website is for educational and informational purposes only. Please consult with our Disclaimer.