Cryptocurrency is a new asset class that is spreading its reach to investors and retail traders alike. The overall crypto market has been growing at an astronomical pace in the past few years. The crypto market is still very much in its infancy and as a result, will be full of its growing pains.
One of those pains is a lack of consistent execution across different exchanges and brokers. Slippage in crypto is something that most retail traders and investors will naturally experience as the market grows and develops. In this article, we will discuss what is slippage in crypto, how to avoid it, and the long-term impacts of slippage for crypto traders and investors.
- Slippage is the difference between the expected fill price and the actual fill price
- There are different factors that can impact your execution slippage in crypto
- Investors and traders who trade crypto should know how to measure their execution slippage
Slippage In Crypto Explained
In trading, slippage in crypto is the difference between a trader’s expected fill price and actual fill price. When submitting market orders in a fast-moving market like crypto, traders can experience higher than normal levels of slippage.
This is partly due to the fact that the crypto market is less developed than the stock market and there is a lack of integrated exchanges available for retail brokers. As a result, traders can experience less favorable fills when trading crypto.
The slippage experienced by traders in crypto will vary widely depending on their broker and the kind of liquidity they provide. In addition to this, some brokers have built-in slippage that can vary widely from other providers. This is put in place by brokers as extra protection due to the volatile nature of crypto.
Factors the Impact Slippage in Crypto
There is a multitude of different factors that can impact your level of slippage when trading crypto. Below are some of the different factors.
- The broker or exchange you trade with
- Size of your orders
- The type of orders you use (market vs. limit)
- The different crypto’s or alt-coins you trade
- Time of day you trade
- Trading frequency
These are just a few of the factors that can impact your trade execution and cause you to experience different levels of slippage. As such, it’s important to know how to measure your execution slippage so you know how good or bad your execution is.
How is Crypto Slippage Calculated
A standard method for accurately calculating your execution slippage is by requesting execution logs from your broker. This information is stored on the broker’s trade databases and they are legally required to provide it to their customers.
The execution logs should contain the following information regarding your fills.
- The time you placed the order request
- The crypto or altcoin you requested to trade
- Size of the order
- The time your order was filled
- The fill price you received
Some brokers that are more transparent will provide slippage amounts to their customers. However, to calculate your slippage you simply need to subtract the requested rate from the fill rate. This will show you how much slippage you experienced from your trades. It’s important to note that you can experience positive and negative slippage when trading crypto.
Positive and Negative Slippage in Crypto Explained
A lot of newbie traders don’t understand what slippage is or how it works. There are actually two types of slippage that traders can experience – positive and negative slippage.
Positive Slippage in Crypto
A positive slippage scenario occurs when traders receive better fills than they requested. This improves clients’ fills and reduces their cost basis. For buy orders, clients get to buy lower. For sell orders, clients’ fills are filled higher helping them lock in more profits.
Negative Slippage in Crypto
Negative slippage is when traders receive worse fills than they requested. It makes their cost basis higher and negatively impacts them. For buy orders, this means that their order is filled at a higher price, instead of buying at a lower price. For sell orders, this means that traders sold lower when they could have sold higher.
Important Note: Before you start trading crypto, it’s important to find out how your broker processes a fill when there the market moves in favor of the clients. Are improvements passed back to the client or are clients simply filled at their requested rate? If you plan to day trade crypto this is extremely important to know.
Slippage Tolerance in Crypto
Popular exchanges like Pancakeswap give traders the ability to specify slippage tolerance for market orders. Slippage tolerance is a setting that allows you to set the percentage of your order’s transaction value you deem acceptable for potential slippage. If the price for crypto changes rapidly and moves above your set tolerance percentage, you won’t receive a fill.
This doesn’t mean that your fills will automatically get slipped by the set amount. It means that if the price of the coin deviations above the set slippage tolerance, you don’t want to get filled. This is very helpful in controlling your transaction costs when trading. It’s especially helpful for a fast-moving market like crypto.
How to Minimize and Eliminate Crypto Slippage
Apart from specifying your slippage tolerance, there are other ways in which you can minimize and eliminate crypto slippage.
- Use Limits Orders – Limit orders will only fill if the specified price level is hit. This means that you will never receive a fill worse than what you requested. This completely eliminates the potential for slippage, however, it doesn’t guarantee that you will actually receive a fill.
- Avoid Trading Fast Moving Markets – Certain cryptos and altcoins are filled with massive levels of volatility which are naturally prone to execution slippage. Avoiding trading will reduce your slippage in crypto trading.
- Avoid Trading Illiquid Instruments – Poor liquidity is another factor when it comes to slippage. Less developed crypto projects and altcoins will naturally have less liquidity and trading interest. Avoiding these will help you improve your trading fills.
- Trade Smaller Order Sizes – Larger orders are naturally prone to slippage. Breaking your orders down to smaller sizes is a way to ensure you get better fills.
As a trader, it’s important to keep these in mind when trading. Before you trade, you should consciously be having these factors in the back of your head as they can have an impact on your execution.
Trading slippage in crypto should be perceived as an avoidable expense. Let’s assume you want to buy Litecoin with the current market price of $100.50 per coin. You submit an order with your broker, but once you receive the fill, the trade has been filled higher at $101.00 per coin.
This example demonstrates $0.50 in negative slippage.
You bought higher and increased your cost basis by $0.50 per coin. If you had bought 100 Litecoin, this would equate to $50 in slippage. Compound this amount over the course of hundreds of trades and slippage can quickly amount to hundreds of thousands of dollars in costs.
As a trader, controlling your trading costs and expenses is an extremely important component of becoming more profitable. A way to avoid this is by using a limit order or specifying a low slippage tolerance with your broker.
Cryptocurrencies can be extremely volatile and traders should be fully aware of the long-term impacts of negative slippage. Understanding how slippage in crypto works will help you improve your trading and minimize your costs.
It’s important to become familiar with how your broker processes orders and what kind of slippage tolerance options they have. Knowing this information will help you trade at the most liquid times while controlling your costs and helping you make better trading decisions.