Understanding Of Slippage In Cryptocurrency & Tips To Prevent
You’ve probably noticed that trade orders don’t always execute at the exact price you desire while trading cryptocurrencies. Some orders will perform at a greater price, while others will perform at a lower price. This is known as price slippage.
Some currencies require additional liquidity, making it difficult to avoid slippage while trading. Also, if you are a day trader or a short-term trader, it may be difficult to sell utilising limit orders every time.
Therefore, what causes slippage, and how may it be avoided?
To purchase or sell crypto, traders employ predetermined pricing, with slippage occurring when an order is executed at a different price than the initial price. Depending on the influence on deals, this can be useful or bad. A positive approach allows for better purchase rates and earnings, but negative causes lower product prices and lower deals. For example, if a trader sells an LTC for $50 but completes the transaction for $48, the transaction is completed at a lesser price.
Causes
Price volatility and a lack of liquidity are the primary causes of crypto market slippages. Order slippage can be caused by excessive price volatility and variable asset prices. Additional factors influencing cryptocurrency pricing include demand, supply, market sentiment, user enthusiasm, and regulatory prohibitions. Because there are few buyers and sellers, individual cryptocurrencies are subject to slippages due to low market liquidity. Significant price slippage is less likely in a less liquid market.
Definition of Tolerance For Slippage
A slippage tolerance percentage expresses how much you are ready to pay for a cryptocurrency asset based on market changes. A high slippage tolerance threshold allows transactions to be processed despite price fluctuations, making it beneficial in volatile markets or crypto ventures with limited liquidity. But, it can expose you to front-running, which occurs when attackers utilise information to buy and sell shares before and after a pending transaction, leading you to pay the best slippage price available while the front-runner profits from the value differential.
Final Takeaways
Slippages can be costly for short-term traders, particularly those who make several transactions. Use limit orders, trade-in less volatile markets, and avoid important events or announcements to reduce their influence. Limit orders ensure completion at the intended cost, but they may miss opportunities to commence trades. Investing in highly liquid assets can also assist in reducing transaction slippages.
