Hello Everyone, this time I will write a homework to fulfill the task of Professor @awesononso regarding Bid-Ask Spread

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The tasks listed include:

1. Properly explain the Bid-Ask Spread.

2. Why is the Bid-Ask Spread important in a market?

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.

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.

5. In one statement, which of the assets above has the higher liquidity and why?

6. Explain Slippage.

7. Explain Positive Slippage and Negative slippage with price illustrations for each.

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[1] Properly explain the Bid-Ask Spread

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In a sale and purchase transaction of an asset there will always be an offer from the seller and the buyer. The price offered by both parties forms an attractive price difference. This price difference will be negotiated by both parties intensely so that the sale and purchase transaction reaches an agreement. This price difference is known as the Bid-Ask Spread.

• Bid Price

The Bid Price is the highest price a buyer can offer when they want to buy a crypto.

• Ask Price

The Ask Price is the lowest price a seller can offer to sell crypto.

• Bid-Ask Spread

When the Bid Price and Ask Price meet in the same type of crypto, the difference between the two prices offered forms the Bid-Ask Spread. If it is formulated as : Ask Price - Bid-Price = Bid-Ask Spread.

^{this image taken from Poloniex Exchange}

For example, Prof. Awesononso wants to sell crypto FARM for 224 USDT, while Awakpasnas wants to buy crypto FARM for 189 USDT, so there is a gap of 224 USDT - 189 USDT = 35 USDT. This difference is called the Bid-Ask Spread.

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[2] Why is the Bid-Ask Spread important in a market?

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The Bid-Ask Spread is one indicator to read the liquidity of a crypto, the smaller the gap Bid-Ask Spread that is formed, the more liquid a crypto is, in the sense that the crypto is a crypto that is in demand by many buyers. Meanwhile, the larger the Bid-Ask Spread gap that is formed, the less liquid the crypto is in the sense that it is less attractive to buyers.

An example of a Small Bid-Ask Spread gap on crypto Ethereum (ETH), as follows:

^{this image taken from Poloniex Exchange}

An example of a Large Bid-Ask Spread gap in crypto Harvest Finance (FARM), as follows:

^{this image taken from Poloniex Exchange}

From the two pictures above, we can see that crypto ETH has a smaller Bid-Ask Spread gap compared to crypto FARM, so it can be concluded that crypto ETH is more liquid and more attractive to buyers than crypto FARM.

For crypto hunters and for traders, of course this Bid-Ask Spread greatly influences their decision to determine which crypto to buy and trade. This barometer can help buyers to be wiser in choosing crypto to buy or to trade.

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[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.

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Answer for crypto X :
a.) The formula : The Bid-Ask Spread = Ask Price - Bid Price
The Ask Price = $5.20
The Bid Price = $5
Becomes :
$5.20 - $5 = $0.2

b.) The formula : %Spread = (Spread/Ask price) x 100
Becomes :
($0.2/$5.20) x 100
= 0.0385 x 100
= 3.85%

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[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.

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Answer for crypto Y :
a.) The formula : The Bid-Ask Spread = Ask Price - Bid Price
The Ask Price = $8.80
The Bid Price = $8.40
Becomes :
$8.80 - $8.40 = $0.4

b.) The formula : %Spread = (Spread/Ask price) x 100
Becomes :
($0.4/$8.80) x 100
= 0.0455 x 100
= 4.55%

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[5] In one statement, which of the assets above has the higher liquidity and why?

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Crypto X has more liquidity than crypto Y, because the Bid-Ask Spread of crypto X ($0.2/3.85%) is smaller than crypto Y ($0.4/4.55%).

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[6] Explain Slippage

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Slippage is a condition when there is a difference between the desired price and the price used at the time of execution of the transaction.
This situation often occurs, especially when volatility or market mood is higher than usual.

When making a transaction, we certainly want the selling or buying price according to the price stated at the time of the transaction, but it is not always as expected because the value of crypto assets is volatile and will always change every second. This is called Slippage.

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[7] Explain Positive Slippage and Negative slippage with price illustrations for each

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Slippage can sometimes be profitable, sometimes it can be detrimental. The profitable slippage is called Positive Slippage, while the bad one is called Negative Slippage.

a.) Positive Slippage
When the executable crypto price is below the desired crypto price, then the buyer will make a profit.

As an example :
Prof. Awesononso has $10 in capital and wants to buy crypto "Z" at $2 per coin, so Prof. Awesononso will get 5 crypto coins "Z".
It turned out that at the time of execution, the price of crypto "Z" was $1.5 per coin, so Prof. Awesononso got 6.67 crypto coin "Z" from a capital of $10.
The results obtained by Prof. Awesononso exceeded expectations, from 5 coins to 6.67 coins, so this Slippage became a Positive Slippage.

b.) Negative Slippage
The opposite of Positive Slippage, Negative Slippage is when the price of the executed crypto is above the desired price, the buyer will suffer a loss.

As a continuation of the example in point a:
Crypto "Z" offered by Prof. Awesononso was executed at a price of $2.5 per coin, so Prof. Awesononso only got 4 crypto coins "Z" from a capital of $10.
The results obtained by Prof. Awesononso was below expectations, from 5 coins to 4 coins, so this Slippage became Negative Slippage.

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Conclusion

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• Knowledge of Bid-Ask Spread is very important in helping traders choose an asset, especially crypto assets. traders can analyze more carefully about the liquidity of a crypto, so that all trades made can be profitable.

• Bid-Ask Spread can also be a benchmark for the popularity of a crypto, so that novice traders can choose coins correctly and observantly, according to the expected target.

• Slippage is a situation that will always exist and is unpredictable, but all knowledge possessed by traders can help minimize the possibility of Negative Slippage, so never stop learning about crypto.

• Hopefully this article can add insight from all of us, thank you to Professor @awesononso has shared his knowledge in this week's assignment.

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Thank you for reading my blog, hope it will be useful for readers.
See you in the next post!!