In crypto trading, you should have observed that trade orders don’t usually execute at the specific price you desire when you place them.
Sometimes, your order could execute at a higher rate, and next time, it could be lower. This occurrence is known as crypto slippage.
And for this article, we will focus on what crypto slippage is, its causes, and how to avoid crypto slippage.
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What is Slippage in Crypto Trading?
Slippage in crypto trading occurs when traders purchase or sell their assets at a price higher or lower than the expected price. In a nutshell, slippage is the difference between a trade’s expected and actual price. And it often happens when buying and selling cryptocurrencies.
In trading, you’d usually have a particular price at which you would buy or sell. But since the cryptocurrency market moves fast, the price could change when your order enters the market, and you immediately complete the trade.
Therefore, you could end up buying or selling at a lesser or higher price than you desired. So, slippage in crypto trading refers to the difference between the price you intended and the price you settled for.
Causes of Slippage in Crypto Trading
Typically, crypto trading slippage happens during high volatility or when there is low or lack of liquidity in the market. Slippage can either be positive or negative. But whatever the case, the slippage tolerance will affect your expected price and the price you trade the assets.
1. Low or Lack of Liquidity
Let’s say you place a large market buy order of 100 BTC for $20,000 per Bitcoin on an exchange with low liquidity. A lack of liquidity means that your entire order cannot be filled at your desired price.
Thus, some of your orders will need to be matched with sell orders beyond $20,000 to be fully executed.
- 150% of your order will be matched with a sell order at $20,000
- 25% of your order will be matched with a sell order at $20,001
- 25 BTC will be matched with a sell order at $20,002
- So, your average price will be $20,000.75, which is higher than $20,000. Hence, you have a negative slippage of $75
2. High Volatility
High volatility can trigger sleep, Adrian, when the market price shifts post-order placement. Let’s assume you want to place the same market buy order as in our first example of 100 BTC for $20,000 per BTC.
During the order placement, BTC bid/ask prices are posted on the order book as $19,990.50/$20,000. Also, price fluctuations occur rapidly in volatile markets, even within the few seconds needed to fill an order.
Moreover, the order can impact the market by giving information that high-frequency traders can leverage when frontrunning.
High volatility in the Bitcoin market results in a fast price shift triggered by high-frequency trades before the order gets filled. This causes the bid/to ask prices to change to $20,000.5/$20,001.
So, the order is filled at $20,001, which incurs an additional cost of $1 per bitcoin for a total of $100 in negative slippage on the 100 BTC order.
Examples of Slippage in Crypto Trading
The price at which a trade is executed is called the “fill price.” This fill price may differ from the trader’s order price because of slippage in crypto trading. Moreover, it usually happens when making market orders.
So slippage can significantly impact trading results, especially if the market is moving rapidly. For instance, let’s assume a trader places an order to buy 100 BTC at $50 per Bitcoin.
But by the time the trade is executed, the price has increased to $51 per Bitcoin. In this case, the trader has experienced a negative slippage of $1, which isn’t in their favor.
Slippage in crypto trading can favor the trader if the market fluctuates in their favor before the trade can be executed. For instance, suppose a trader places an order to sell 100 BTC at $50 per Bitcoin.
But by the time the trade is executed, the price has increased to $51 per Bitcoin. In this case, the trader has experienced a positive slippage of $1, which is in their favor.
Generally, slippage is a key factor you should consider when trading crypto since it can significantly impact trading results. So, traders should always ensure they minimize slippage and try performing slippage calculations before placing trades.
In addition, they should understand the potential impact of slippage and consider it in their trading techniques.
What is Slippage Tolerance?
Slippage tolerance refers to the maximum amount that an order can move against the trader before getting canceled.
Assuming a trader places a buy order for Bitcoin at $11,000 and fixes their slippage tolerance to $100, the order will cancel automatically if the price of Bitcoin moves to $11,100 or more.
This feature is essential for traders because it enables them to protect themselves from huge price fluctuations in the market. Furthermore, it is essential for exchanges since it prevents orders from getting filled at prices far from the initial order price.
So, you’ll have to calculate slippage and know how much you can accept. Usually, you can calculate a slippage percentage you’ll be glad to accept from your desired price of buying the chosen assets.
What is Crypto Slippage in Pancakeswap?
Various platforms have various default percentages of slippage tolerance. For example, the crypto slippage tolerance of Pancakeswap is different from Trust Wallet’s and Uniswap’s slippage tolerance.
So if you’re thinking about what crypto slippage is in Pancakeswap, the default percentage often falls between 0.5% to 1%. Meanwhile, there isn’t any perfect crypto slippage tolerance for Pancakeswap since it often depends on your trading strategy.
However, if you understand how to change crypto slippage on Pancakeswap when making your market order, you can figure out your slippage tolerance for yourself. So, go to Settings and change the percentage of your allowed slippage when performing transactions.
What is Slippage in Uniswap?
The crypto slippage in Uniswap is 0.5% by default, which may not be the perfect percentage for your trading technique. Just like the way you can adjust Pancakeswap’s slippage, you can increase or decrease your slippage tolerance in Uniswap.
When you tap the Settings icon at the upper right corner of your browser, a small window will display where you can adjust your slippage tolerance during trading. Then, set the ideal tolerance for Uniswap based on your trading strategy.
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How to Avoid Slippage in Crypto
In a volatile market like cryptocurrency, there’s no guarantee that you can avoid slippage. This is because of the rapidly changing prices of the coins. But there are ways you can reduce your slippage losses.
- Don’t trade during volatile markets.
Major announcements and events about the cryptocurrency market can considerably impact price movements and result in slippage. So, not trading during these events helps you to prevent slippage or reduce it at least.
- Be cautious during important announcements.
During major announcements, the market tends to be more volatile. Therefore, investors should take their time to decide whether or not they should invest during this period.
For instance, projects’ of grade announcements such as Bitcoin Cash, Ethereum’s The Merge, or Cardano hard forks can significantly affect the price.
- Invest in assets that are popular with high liquidity
Investing in assets that are popular with high liquidity can partly minimize slippage risk. Generally, investors should not enter the market before or after the organization’s announcement of the financial statement. This especially applies to cryptocurrency.
Meanwhile, investors that invest in foreign currency may want to concentrate on the high liquidity pairs such as EUR/USD or USD/JPY rather than the uncommon ones such as TRY/ZAR.
FAQs on What is Slippage in Crypto
A positive slippage gets you a better price than expected, and a negative slippage gets you a lower price than expected. Thus, you can lose money with slippage.
If you set your slippage tolerance too low, your transaction will not be confirmed since it keeps going outside your mark. And if you set your slippage tolerance too high, it might make you susceptible to paying more per token than you intended.
It means no slippage. This means the trader purchases the asset at the exact price expected.
Slippage is common for crypto traders. And it occurs when the market price doesn’t meet your desired price when performing a transaction.
Although it can impact your trading plan, it isn’t always bad. Additionally, crypto slippage can be positive or negative, depending on the situation.