Good morning everyone, steemians, blogers, readers, and crypto lovers. I will start a positive activity today because life must always be productive and today I will write a post about cryptocurrency on my blog to participate in the Steemit Crypto Academy Season 4. This is the first week of Season 4 and the first class that I will enter in this season is professor @awesononso's class. In this class, we will learn and share knowledge about “The Bid-Ask Spread” based on the following questions.
Question 1:
Properly explain the Bid-Ask Spread
In simple terms, the Bid-Ask spread or also called the spread is the price difference between the Bid price and the Ask price, the Bid price is the highest price that buyers are willing to buy while the Ask price is the lowest price that sellers are willing to sell, and Limit orders play an important role in creating Bid-Ask spreads in each market.
Formula:
Bid Ask spread = Ask Price – Bid Price
The picture above is a display of the Bid-Ask spread for the STEEM/TRX trading pair today. The green cloud is Bid while the red cloud is Ask, in the picture it can be seen that the two clouds are not too far apart and the distance between the two clouds is called as the Bid-Ask spread. Based on the order book data in the picture, the Bid-Ask spread of STEEM/TRX is 7.6 - 6.5 = 1.1. That way, traders can identify that the market has low liquidity and relatively low trading volume. The main philosophy to remember is that the higher the Bid-Ask spread and the farther the distance between the green-red clouds, the lower the liquidity & trading volume, and vice versa.
Question 2:
Why is the Bid-Ask Spread important in a market?
Bid-Ask spread can usually be used as a benchmark in identifying the market before traders decide to place an order, both Buy orders and Sell orders. When the Bid-Ask spread is low the liquidity tends to be high and that means there are many sellers and buyers who are actively involved in trading in the market. With the Bid price and Ask price close together, a supply-demand balance will be created in the market, which allows traders to fulfill orders quickly and does not require long waiting times, and vice versa. That way, traders will usually choose to trade in markets that have high liquidity with very low Bid-Ask spreads of course.
Question 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
a.) Calculate the Bid-Ask spread
Bid-Ask spread = Ask Price – Bid Price
Bid-Ask spread = $5.20 - $5
Bid-Ask spread = $0.2
b.) Calculate the Bid-Ask spread in percentage
Percentage Spread = (Spread / Ask Price) x 100%
Percentage Spread = ($0.2 / $5.20) x 100%
Percentage Spread = 3.846%
Question 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
a.) Calculate the Bid-Ask spread
Bid-Ask spread = Ask Price – Bid Price
Bid-Ask spread = $8.80 - $8.40
Bid-Ask spread = $0.40
b.) Calculate the Bid-Ask spread in percentage
Percentage Spread = (Spread / Ask Price) x 100%
Percentage Spread = ($0.40 / $8.80) x 100%
Percentage Spread = 4.545%
Question 5:
In one statement, which of the assets above has the higher liquidity and why?
Based on the philosophy, the lower the bid-ask spread, the higher the liquidity, and vice versa. From these two cases, I can say that Crypto X has higher liquidity than Crypto Y because Crypto X has a lower bid-ask spread than Crypto Y, Crypto X's bid-ask spread is $0.2 while Crypto Y's bid-ask spread is $0.4. This also indicates that the trading volume of Crypto X tends to be more than the trading volume of Crypto Y.
Question 6:
Explain Slippage
Slippage is a phenomenon of price changes in a very very short time span that causes a market order to be executed at a price that does not match the market price when the order is placed by a trader and this usually occurs in markets that have large bid-ask spreads with low level of liquidity.
Question 7:
Explain Positive Slippage and Negative slippage with price illustration
a.) Positive Slippage with price ilustration
In this case, the market order placed by the trader will be executed at a more favorable price, both on Buy orders and Sell orders.
Buy orders example:
The market order was placed at a price of $2 but it turned out that the order was executed at a price of $1.9 so that the trader experienced a positive slippage phenomenon of $0.1 ($2 - $1.9 = $0.1) which made the trader get more profit, of course.
Sell order example:
The market order was placed at a price of $2 but it turned out that the order was executed at a price of $2.1 so that the trader experienced a positive slippage phenomenon of $0.1 ($2.1 - $2 = $0.1) which made the trader get more profit, of course.
b.) Negative Slippage with price ilustration
In this case, the market order placed by the trader will be executed at an unfavorable price, either on a Buy order or a Sell order.
Buy orders example:
The market order was placed at a price of $2 but it turned out that the order was executed at a price of $2.1 so that the trader experienced a negative slippage phenomenon of $0.1 ($2.1 - $2 = $0.1) which made the trader not get more profit, of course.
Sell order example:
The market order was placed at a price of $2 but it turned out that the order was executed at a price of $1.9 so that the trader experienced a negative slippage phenomenon of $0.1 ($2 - $1.9 = $0.1) which made the trader not get more profit, of course.
The bid-ask spread is one of the most important benchmarks for traders to pay attention. Based on the Bid-Ask spread, traders can identify market conditions simply and traders can consider the best decisions before making a trade. The lower the Bid-Ask spread of an asset, the higher the liquidity of the asset, and vice versa. Bid-Ask spreads can provide traders with an overview of the market and traders can consider which market is better of course. Thank you Professor @awesononso, very interesting theme to start this new season and through this course I can understand Bid-Ask spread more deeply.
