That means there’s plenty of liquidity, which additionally lowers slippage. That’s because of the main factors that cause slippage in the first place, which we’ve established to be price volatility, market liquidity, and network congestion. When a cryptocurrency trader places an order to buy or sell an asset, there might not be enough funds from counterparties to fulfill that order at the requested price immediately. In that case, the initial trader’s order (especially if it’s a significant one) might be filled by multiple other traders at different times and prices. Slippage in crypto is a difference between prices when the trade is initiated and when it is executed. It is not a strictly cryptocurrency phenomenon and is present in most how to research nfts trade markets.
Strategies to Minimize Crypto Slippage
DEXs like UniswapX, 1inch, and SushiSwap are among the best in managing slippage, thanks to their liquidity aggregation and optimization features. Uniswap V3 introduced concentrated liquidity, allowing liquidity providers to focus their assets in specific price ranges, reducing slippage. 1inch improves trade execution by sourcing liquidity how to buy a ruby from multiple platforms, while SushiSwap offers deep liquidity for many popular tokens. These platforms, combined with growing liquidity in Web3 markets, make slippage on high-volume trading pairs like ETH and stablecoins negligible. Negative slippage, on the other hand, happens when a trade executes at a worse price than expected.
- On the other hand, DEX trading always moves assets between wallets, so there’s dependence on the networks’ capacities.
- In these instances, savvy traders can simply wait out the instability to avoid higher gas fees and unacceptable slippage.
- On decentralized exchanges, you can tweak the settings to set the maximum slippage you are willing to accept.
- Slippage can occur in different forms, with each having their own implication for traders.
- Decentralized exchanges (DEXs) introduced a novel market structure that replaced the order book matching system with liquidity pools, fundamentally transforming price discovery and trading dynamics.
What Is Slippage in Cryptocurrency Trading?
This is more common and undesirable for traders, who receive fewer tokens or pay more than anticipated. For example, if a trader expects to sell a token at $100 but the price drops to $95 before execution, the trade is executed at a loss relative to the expected price. Yes technically slippage causes you to lose money because it usually means that you purchase the asset at a higher price than what the market price was prior to the trade. On rare occasions price swings in the market can result in positive slippage in which case you pay less for the asset.
How Does dYdX Provide a Low-Slippage Trading Experience?
On the other hand, trading on a DEX is fully decentralized but often incurs higher slippage. Network congestion occurs when there’s more activity than the blockchain can handle. Due to their programming and technical limitations, networks have a set number of transactions they can process and confirm in a set period.
Are Slippage and Spread the Same Thing?
Let’s say you want to purchase the cryptocurrency listed on a crypto trading platform for $10.00. After placing your market order, you discover that it was actually filed for a higher price of $10.50. In the traditional market, timing major events and announcements are easier because they often follow a structured and planned calendar. However, to a large extent, the crypto market is not yet as structured and stable, as an influencer’s social media activity can change a token’s price in no time.
It can also be more challenging to match buyers with sellers in markets for small and obscure altcoins (or non-Bitcoin/Ethereum). For reference, buyer and seller match means connecting buy and sell orders, for the same security, placed at around the same time. Thinly traded assets with a wide bid-ask spread have greater odds of slippage because there’s a significant difference between buy and sell prices. Another way to reduce the effect of slippages on your trades is to trade in less volatile markets. This may sound impossible since the crypto market is generally volatile and experiences price changes quickly. However, to avoid wide slippages, you should be wary of trading during periods when some major events or announcements can affect the market.
For example, you could go to Uniswap and give them 50% in value in BTC and 50% in ETH to join their BTC – ETH liquidity pool. In this case, getting started your order might move the price significantly and you may need to increase your slippage tolerance closer to 1% or more. Find out why some traders prefer placing sell stop market orders to exit the market.
This is especially true for cryptocurrency traders who rely on market orders, which prioritize execution speed over price precision. Prominent centralized exchanges usually encounter less slippage than decentralized exchanges. Binance, for instance, automatically sets slippage tolerance to 0.5% and also allows traders to adjust it manually. That is because the cryptocurrency market is smaller than the rest and has less liquidity. However, the exact slippage tolerance in crypto varies between traders and often depends on the circumstances.
