THE BID-ASK SPREAD

Before we go into the definition of what the Bid-Ask spread is all about, it is of great advantage to proper understanding if we do a break down and make a definition of the Bid price and the Ask price.

BID PRICE

The highest price a buyer is ready to pay for a product is known as the bid spread.

ASK PRICE

The ask price is the lowest price at which a seller is willing to sell a commodity.

BID-ASK SPREAD

As a result of the previous explanation, the Bid-Ask spread, in my own words, refers to the price difference that exists between the seller's and buyer's prices.

Arithmetically, the Bid-Ask spread = Ask price- Bid price.

Furthermore, since traders and market makers are involved in trading, Bid-Ask is the transaction cost, with the price taker always wanting to buy at a low price and the market maker usually wanting to sell at the bid or high price.

Source

WHY IS THE BID- ASK SPREAD IMPORTANT

The concept of the bid-ask spread is frequently employed to measure market liquidity.

For a commodity to be traded swiftly, the supply-demand balance in the marketplaces is critical. The market is liquid when this equilibrium is reached.
There are plenty of buyers and sellers in a liquid market. The bid and ask prices are nearly identical in this scenario. As a result, the price difference between the two will be minimal.

The difference between these two prices is known as the bid-ask spread, as mentioned in the previous question. The bid-ask spread will therefore be narrow in a liquid market.

WHAT WILL BE THE BID – SPREAD IF CRYPTO X’S BID PRICE IS $5 AND ITS ASK PRICE BE $5.20

The bid-ask spread is equal to the difference between the ask and bid prices.
The Bid – ask spread = $5.20 - $5

That is the Bid – ask spread will be = $0.2
If the bid price is $5, the total cost is $5.20 minus $5, which equals $0.20.

b.) CALCULATE THE BID-ASK SPREAD IN PERCENTAGE

The percentage Spread = the Spread / the Ask Price x 100

The percentage Spread = $0.2 / $5.20 x 100

Therefore the percentage Spread = 3.85

WHAT WILL BE THE BID – ASK SPREAD IF THE BID PRICE FOR CRYPTO Y IS $8.40 AND THE ASK PRICE IS $8.80:

The Ask price minus the Bid price will be equal to Bid-Ask Spread

Bid-Ask Spread = $8.8 - $8.4
Bid-Ask Spread = $0.4

CALCULATE THE BID-ASK SPREAD IN PERCENTAGE

The percentage Spread = Spread / Ask Price x 100

The percentage Spread = $0.4 / $8,80 x 100

The percentage Spread = 4.54

WHICH OF THE ABOVE ASSETS HAS A HIGHER LIQUIDITY AND WHY

Crypto X's spread is $0.2, whereas Crypto Y's spread is $0.4. The spread of Crypto X is smaller in this situation. Higher liquidity is indicated by a narrower spread.

Because the purchasing and selling prices are so close together, there are more trades. As a result, Crypto X has more liquidity.

SLIPPAGE

Cryptocurrency exchange prices can fluctuate dramatically. The price of a coin may change until you place a purchase or sell order for it for x price. Slippage is the term for the shift in pricing. Slippage is more prevalent, particularly in large Bid-Ask Spreads. Due to a lack of liquidity, this is the case.

Slippage is the difference between an order's original bid and its current price, and it most commonly occurs in a wider spread since liquidity is low and there aren't many traders trading at that time.

POSITIVE SLIPPAGE

First and foremost, When an order is completed at a lower price than the buyer or trader intended, positive slippage occurs, giving the buyer or dealer a profit.
OR positive slippage occurs when an order is filled at a higher price than the seller requested, resulting in a profit for the seller.

AN EXAMPLE OF POSITIVE SLIPPAGE

Let's say I want to buy products for $60 and I've previously placed an order, but the order was only fulfilled for $56 by the time it was fulfilled. Isn't it fun?
$60 - $56 = $4 is the positive slippage in this case.

It also works in the opposite direction when it comes to selling items. If I wish to sell items for $80, and the deal is completed, the goods will be sold for $85.
$85 − $80 = $5 is the positive slippage

NEGATIVE SLIPPAGE

Negative slippage occurs when an order is executed at a lower price for the seller or the market maker, but at a higher price for the buyer.

AN EXAMPLE OF NEGATIVE SLIPPAGE

Let’s say I want to make an order for $60 to buy a coin was placed, however the coin was purchased at $67 by the time the order was fulfilled.

$67 - $60 = 7 is the negative slippage
It also works in the opposite direction when it comes to selling items. If I wish to sell items for $80, and the deal is completed, the goods will be sold for $75.
The negative slippage will be as follows:
$80 - $75 = $5

CONCLUSION

Bid-Ask spread is a fantastic approach to make an informed decision when buying and selling in a market, but it comes with its own danger because slippage can occur and you may lose money while trading. However, a thorough grasp of Bid-Ask spread will help you prevent excessive losses.

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