Imagine you are grabbing a coffee at your favourite café. One day, the price was $5. The next day, due to a sudden increase in coffee bean demand, the price jumps to $5.50 as you’re about to pay. This price inconsistency is known as ‘slippage’ in the crypto universe. It happens when you’re all set to buy or sell a cryptocurrency at a certain price, but by the time the transaction completes, the price has shifted, sometimes just a little, sometimes a lot. This can be a result of the highly volatile nature of digital currencies. So, what is this phenomenon about, and how can you handle it?
When purchasing or selling a crypto asset, you want to do so at a specific price. However, if there is a slippage, you must settle for a lower price than you requested. This often occurs when there is a lag between when an order is placed and when it is fulfilled, and the price fluctuates.
How Can Slippage Help Traders
Slippage can positively or negatively affect your trades, depending on how it affects them.
When an order is executed at a lower price than requested, this is known as positive slippage. You stand to gain from this slippage and increase your trade’s profitability.
When your order is filled at a greater price than anticipated, this is known as negative slippage, as opposed to the lower price you expected. Take the hypothetical case of trying to sell one LTC for $50, only to have the deal finalised at $48. In this instance, you were able to purchase at a discount.
What Can Influence Slippage?
Many factors can influence this market phenomenon. It happens because the prices keep changing a lot. These price movements are caused by demand and supply determining the number of people wishing to buy or sell their assets. Other factors are governmental rules and regulations, market participants’ sentiments, and more.
If the market is not liquid, some crypto assets can be subject to slippage since few participants want to trade them. So, if you place an order, especially a large one, the price may change when the system processes your order.
High price turbulence can be another factor impacting slippage.
The costs of digital assets are constantly going up and down in the crypto market. Due to the market’s unpredictability, orders are likely to experience slippage.
How To Avoid It
Avoiding slippage can be very difficult. However, you can control it by setting slippage tolerance.
When setting the tolerance value to slippage, specify the percentage value you can allow if the price fluctuates up or down by it. For instance, if you set a tolerance value of 5% and want to buy $100 worth of cryptocurrency, you are fine with the transaction starting at either $105 as the highest or $95 as the lowest price. The trade will not happen if the price is less than $106 or $100 per share.
Setting a high tolerance value can put you at risk of front-running — an illegal practice of using information to buy and sell assets before others can.
To minimise or decrease the impact of slippage in your trades, you can also use the following tips:
- try limit orders;
- participate in low-volatile trades;
- avoid market participation during major economic or political events;
- avoid market orders since they are susceptible to slippage the most.