1. Properly explain the Bid-Ask Spread.
Before explaining the concept of The Bid-Ask Spread, it will be useful to briefly explain bid spread and ask spread. The highest price the buyer is willing to pay for a commodity is called the bid price. The lowest price at which a seller will be willing to sell a commodity is called the ask price. The Bid-Ask Spread is the difference between these two prices. That is, we can show it with an equality of the form Bid-Ask Spread = Ask price - Bid price.
The Bid-Ask Spread is also called The Spread for short.
2. Why is the Bid-Ask Spread important in a market?
Bid-Ask Spread is a concept that is often used to determine the liquidity in the markets.
The supply-demand balance in the markets is very important for a product to be traded quickly. When this balance is reached, the market has liquidity.
In a liquid market, there are enough buyers and sellers. In this case, the bid price and the ask are close to each other. So the difference between these two prices will be low. As we explained in the previous question, the difference between these two prices is called the bid-ask spread. So in a liquid market, the bid-ask spread will be small.
The opposite is also true. If the bid-ask spread is large in a market, buying and selling is not easy in that market. So this market is an illiquid market.
3. If Crypto X has a bid price of $5 and an ask price of $5.20,
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.
%Spread = (Spread/Ask Price) x 100
%Spread = ($0.2/$5.20) x 100
%Spread = 3.85
4. If Crypto Y has a bid price of $8.40 and an ask price of $8.80,
a.) Calculate the Bid-Ask spread.
Bid-Ask Spread = Ask price - Bid price
Bid-Ask Spread = $8.8 - $8.4
Bid-Ask Spread = $0.4
b.) Calculate the Bid-Ask spread in percentage.
%Spread = (Spread/Ask Price) x 100
%Spread = ($0.4/$8,80) x 100
%Spread = 4.54
5. In one statement, which of the assets above has the higher liquidity and why?
The Spread of Crypto X =$0.2 and The Spread of Crypto Y = $0.4. In this case, the spread of Crypto X is smaller. The smaller spread indicates higher liquidity. Because, the buying and selling prices are close to each other, so more trades are made. So, Crypto X has higher liquidity.
6. Explain Slippage.
Prices on crypto exchanges can change very quickly. When you place a buy or sell order for a coin for x price, the price of the coin may change until you place this order. The change in this price is called slippage. Slippage is more common, especially in wide Bid-Ask Spreads. This is due to low liquidity.
7. Explain Positive Slippage and Negative slippage with price illustrations for each.
It is the situation where the positive slippage buyer/seller profits from these fluctuations.
In positive slippage, the order to buy a coin is executed at a lower price instead of the given price. For example, we placed an order to buy coin A at $10. However, due to the sudden fluctuation, this buying occurred at$ 9.9.
In this case, the positive slippage would be $10-$9.9=$0.1.
OR
We placed an order to sell coin A at $10. However, due to the sudden fluctuation, this selling occurred at$ 10.01
In this case, the positive slippage would be $10.01-$10=$0.1.
It is the situation where the negative slippage buyer/seller losses from these fluctuations.
Negative slippage is the opposite of positive slippage. That is, the order given to buying a coin is executed at a higher price than the given price. For example, we placed an order to buy coin A at $10. However, due to the sudden fluctuation, this buying occurred at$ 10.01.
In this case, the negative slippage would be $10.01-$10=$0.1.
OR
We placed an order to sell coin A at $10. However, due to the sudden fluctuation, this selling occurred at $ 9.9
In this case, the negative slippage would be $10-$9.9=$0.1.
Best Regards, Özge
CC: @awesononso