Hello all,
I am very glad to participate in this season; this is my first post in crypto academy S4. Thank you professor @awesononso for giving a very detailed explanation on the Topic Bid-Ask Spread, which helped me in completing my homework. Here is my homework for this topic…
Properly explain the Bid-Ask Spread?
Bid-Ask Spread is a topic which is used to find liquidity of assets in Crypto market / Commodity market/ stock market. It can be defined as a difference of Ask Price and Bid Price. Through this definition we can create a formula which can be written as:-
To understand it in better way we have to know about these terms:-
- Ask Price
- Bid price
Ask Price: - Ask price is a highest price offer by a seller for his crypto in market for Selling.
Bid Price: - Bid price is a lowest price offer by a buyer in market to purchase a crypto.
So here a question arises, why this situation creates? To understand it we have to go deeper in the market. As we all know in the market if there is difference in supply and demand of anything price affects. To handle this situation in market two types of Party come in scenario one is price taker and other is Market maker. In this market one side (Market maker) decide about the price of assets and the other side (Price taker) decides whether to purchase or sale of assets. There is always a difference in between these two prices and this difference is known as Spread or Bid-Ask spread, bigger the spread liquidity is less and smaller the spread liquidity is more.
Why is the Bid-Ask Spread important in a market?
As we saw above bid-ask spread is the indicator of liquidity, which make this topic important in the market. To understand the importance of bid-ask spread we have to understand about liquidity, so what is Liquidity?
Liquidity is a term which is related with demand and supply of assets. If in the market movement of assets go smooth and fast due to balance of demand and supply, this market scenario is known as Liquidity market. But if opposite situation create market goes slow and liquidity of assets stop or go slow. These situations decide whether market of an asset is good or bad.
Conclusion what we can see here is that liquidity of assets show market condition and length in difference of bid-ask spread shows liquidity condition. From this we can saw that bid-ask spread is a measuring tool of market conditions. Which make it very important for market.
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.
Answer;-
Ask price= $5.20
Bid Price= $5
Bid-Ask Spread = Ask Price – Bid Price
= $5.20- $5
= $0.20
Bid-Ask Spread %= (Spread/Ask price) x 100
= (0.20/5.20) x 100
= 3.84%
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.
Answer;-
Bid-Ask Spread = Ask Price – Bid Price
= $8.80- $8.40
= $0.40
Bid-Ask Spread %= (Spread/Ask price) x 100
= (0.40/8.80) x 100
= 4.54%
In one statement, which of the assets above has the higher liquidity and why?
From above Calculation we find that Crypto X spread value is $0.20 and Crypto Y spread value is $0.40, as per above Bigger the spread liquidity is less and Smaller the spread liquidity is more so Crypto X is more liquidate.
Explain Slippage
As we know market is volatile due to which slippage happened. In this volatile market it’s happen, Order placed time and order executed time may differ and difference of this time may change the order price. This is known as slippage. In this situation trader may have a positive slippage or negative slippage.
In the above situation of slippage we have seen two conditions let understand it:-
Positive slippage: When slippage happened trader may face that what the Order price placed its may increase at the time of execution due to which trader get profit, which is good thing for him. So it is known as positive slippage.
Let’s take an example;-
Suppose that Trader A placed an order for selling a crypto X at a price of $60 but at the time of execution order price change to $60.50. Then trader gains a profit of $0.50 it is a positive slippage for him.
Negative slippage: When the order placed price is less than order executed price due to slippage it’s known as negative slippage.
Let’s take an example;-
At the vice versa of above condition If crypto X price at the time of order placed for selling is $60 and at the time of execution it will be at $59.50 it is a negative slippage for trader because trade face of loss of $0.50.
Thats all from my side, Thank you for reading my homework.
Thank You
with regards,
@jyotisingh