The crypto space is filled with new and unfamiliar terminology, often leaving crypto beginners feeling confused and overwhelmed. Today, we’re here to explore one of those terms and provide an answer to the question: what is slippage in crypto?
Slippage is a typical occurrence in the often unpredictable and fast-moving crypto markets. If you keep reading, you’ll find its meaning, how it works, its causes, ways to reduce its impact, and more.
What Is Slippage in Crypto?
Slippage is the price difference between what you expected and the actual outcome of a trade. Suppose you reach for an orange at a market stall just to find out it has been changed for a slightly different one by the time it’s in your hands.
But what does slippage mean in crypto? Here’s an example: You want to buy Bitcoin for $70,000, so you order 1 BTC. Still, the trade executes for $70,200 because of liquidity issues or market volatility. So, your trade had a higher cost than expected, leading to potential profit loss.
Types of Slippage
Explore these two primary types of slippage to understand the concept better.
What Is Slippage Tolerance?
It’s a trading platform setting that allows you to set the price slippage you are willing to accept so that your order is executed. If you don’t put a price tolerance before the market slips, the order will execute at the next available market price.
How Does Slippage Work?
Slippage occurs through the interaction of current market conditions and market orders. When a market order is placed, it tries to execute immediately at the best price. Prices may shift quickly during the time it takes for the order to be executed if the market is highly volatile.
Moreover, if the market lacks sufficient liquidity, the order may be executed at the next best available price, which is often less favorable. This leads to the actual cost being different from the expected one, known as slippage.
How to Calculate Crypto Slippage
The first step is finding the difference between the executed trade and current market prices. For instance, if you bought one token at $1,000 but it was executed at $800, the slippage is $200.
You can also use slippage percentage, which you can find by dividing the price difference by the current market price. Considering our last example, the rate would be 20% (200/1,000). However, if you don’t want to go over the hassle of calculating slippage, many resources and tools are available to help.
Using a crypto slippage calculator lets you understand traders’ strategies and whether you need to avoid specific platforms or trades altogether.
Slippage Across Different Blockchain Networks and Platforms
Let’s find out if slippage is more common on some networks and platforms than others.
Bitcoin
Bitcoin is considered the best crypto to trade due to its high liquidity, and as such, it usually experiences lower slippage. Yet, large orders or high volatility periods can still result in price slippage.
Example: You want to buy BTC for $30,000, but the execution costs $30,050, so the slippage is $50.
Meme Coins
Since meme coins are more volatile and less liquid, they often result in higher slippage. Trader slippage in meme coin trade can be significant due to these factors.
Example: You want to buy a meme coin for $0.01, but you end up paying $0.012 due to low liquidity. The slippage is 20%, or $0.002.
Centralized Exchanges
Centralized exchanges often have minimal crypto slippage. That’s because they offer faster trade execution and higher liquidity. Moreover, these exchanges provide limit orders, whereas most decentralized ones don’t.
Example: You place a large order on Binance, but instead of paying $2,000, you pay $2,001, a minimal slippage of $1.
Decentralized Exchanges
Decentralized exchanges may experience higher slippage. They often work with liquidity pools, and slippage may occur due to large orders, less popular or new cryptocurrencies.
Example: You expect to buy a less-known ERC-20 token on Uniswap for $1, but due to insufficient pool liquidity, you experience a 5% slippage and pay $1.05.
Why Does Slippage in Crypto Happen?
Let’s explore the most common causes of slippage.
Volatility
Volatility refers to the unpredictable and quick price changes of a digital asset. During a high-volatility period, prices fluctuate within seconds, making executing trades at desired prices challenging. This can lead to price slippage.
Think of it as wanting to jump in on a moving train. Due to its speed, you can’t land where you expected.
Quick price fluctuation results in more significant slippage in highly volatile markets, so traders should be mindful of market conditions before they make their trades.
Low Market Liquidity
We mentioned low market liquidity when we discussed the slippage meaning and types. To better understand how low market liquidity leads to slippage, let’s take a less crypto-native example.
Suppose you want to buy 20 muffins from a cake market. When you go to the first stall, you can see they have 20 muffins, each costing $2, so you calculate that you will spend $40. Yet, while you count your money and hand over the cash, someone buys five. You buy the remaining 15, and you still need five more.
The next stall only has two muffins, priced at $3 each, so you buy those and look for three more. You finally find your three last muffins in the next stall, selling them for $5 each. Overall, you end up paying $51 for the 20 muffins instead of the initially expected cost of $40.
The crypto market is similar to this cake market. If there isn’t sufficient liquidity, slippage becomes a problem.
Order Size
When people place large orders, there may not be sufficient trading volume or liquidity to execute the whole order at one price point. So, it ends up being executed partially at different prices, often resulting in higher slippage cost.
Network Congestion
We can relate this to a border between countries. No matter how many cars are waiting to cross the border, each vehicle can be let through as quickly as humanly possible, which, at busy times, may result in delays.
Similarly, blockchain transactions wait in a queue, but if everyone tries to transact simultaneously, it may take a while before your transaction goes through. That means the price may change while you wait for your transaction to be processed.
Ways to Reduce the Impact of Slippage
The following strategies allow you to reduce the impact of slippage on your crypto transactions:
Conclusion
So, what is slippage in crypto? Simply put, it’s the price difference between what you expected and the actual outcome of a trade. It occurs due to low marketing liquidity, volatility, network congestion, and order size.
You can calculate slippage yourself or use some tools and resources to help you. While you cannot always predict slippage with certainty, it can be more common on some networks and platforms than others.
Fortunately, several strategies and tools can help reduce the impact of slippage.