CryptoAcademy Season 4 Week 1 / Homework Post for Professor @awesononso / Bid-Ask Price

Wow, really nice and interesting tasks, this task will really help me learn more about Bid-Ask Spread and slippage which are of two types positive and negative slippage.

Now to the lecture properly

Question 1

Properly explain the Bid-Ask Spread.

Answers

THE BID SPREAD

The bid spread is the highest amount of money or the highest price that a person buying assets (buyer) is able and willing to pay for the purchase of a particular assets in the market.
The ask spread is the smallest amount of money or funds, we can also say the smallest (lowest) price that a person marketing or selling assets is able and willing to let go or sell his asset .
The Bid-Ask spread after the definition of both the bid spread and ask spread is the price that differs the bid price and the ask price.
It has a formula that is

Bid-Ask Spread = Ask price - Bid price

Question 2

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

Answer
In as much as Bid-Ask spread is the difference between the ask price and the bid price, it will be fundamental in the market in a lot of ways because through it the marketers in a lot of ways will have knowledge about how the market is, if it will be easy(liquid) for them to enter which means the market is liquid but if otherwise the will also have knowledge about it to avoid lose of funds.
It should also be noted that if the difference between the Bid price and ask price is low it means the market is easy(liquid) but if otherwise it means the market is hard for trading.

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.

Answer

Calculating the Bid-Ask spread.

As I explained in Question 1 about the formula of Bid-Ask spread, I will be showing solving the following question.

Here the Ask spread is $5.2 and the ask price is $5 applying the formula, it will be

Bid-Ask spread = Ask spread - Bid spread

Bid-Ask Spread = $5.2 - $5

Bid-Ask Spread = $0.20

Calculating the Bid-Ask spread in percentage.

Formula for calculating %spread is
%spread = (Spread/Asking price) x 100

Where spread is $0.20, asking price $5.20 and 100(constant)

%spread = (0.20/5.20) x 100
%spread = (0.03846) x 100
%spread = 3.85%

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.

Answer

Calculating the Bid-Ask spread

Here the Ask spread is $8.80 and the ask price is $8.40 applying the formula, it will be

Bid-Ask spread = Ask spread - Bid spread

Bid-Ask Spread = $8.80 - $8.40

Bid-Ask Spread = $0.40

Calculating the Bid-Ask spread in percentage

b) formula for calculating %spread is
%spread = (Spread/Asking price) x 100

Where spread is $0.40, asking price $8.80 and 100(constant)

%spread = (0.40/8.80) x 100
%spread = (0.0454) x 100
%spread = 4.54%

Question 5

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

Answer
Has I explained earlier in the previous question, the assets with higher liquidity is crypto x ($0.20) because it is smaller than crypto Y($0.40) and this means the market will be easy for traders to trade in (buying and selling easy)

Question 6

Explain Slippage

Answer
Slippage is when there is a change or a difference between the budgeted amount of an assets and the price that the assets will be finally sold or bought. It is of 2 type one which is positive slippage which is a favourable and profit making slippage while the other is negative slippage which is not favourable to the traders because the lose funds here.

Question 7

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

Answer

positive slippage

The positive slippage is the type of slippage that is of great benefits to traders of assets both the buyers or sellers because the trader may plan of executing an order with a higher budget but will end up getting it at a lower amount. It is applicable to selling asset here the trader end up selling the assets at a higher price than the lower price he was selling because of a slip in the price (favourable)
For example,
Mr Emeka goes to the market with about $200 to execute a project of buying bitcoin but a slip occur in price and he ends up getting it at $ 170 meaning that the slippage will be $30 which will be of great benefit to him .

Negative slippage

The negative slippage is the type of slippage that doesn't benefits the traders both the buyers and those selling because the trader may plan of executing an order in a lower price but end up executing it at a price higher than what he planned, making it unfavorable to the trader which may be buyer same thing is applicable to a seller who plan of selling asset at a higher price but finally sells it out at a price lower than the planned price which will not be of benefits to him.
For example
Mr Nkem goes to the market to buy an asset with the plan of using $150 for the assets reaching the market a slippage occur making him to finally spend $175.
The slippage will be $175 - $150 = $25 which will be a huge lost to him because that was not his plan.

Conclusion

I really enjoyed the lecture by professor @awesononso. He really helped me understand what slippage is all about and how I can calculate both Bid-Ask spread and the %spread.