What is Slippage in the Crypto World?
‘Slippage’ is another familiar word frequently found in the common stock market and cryptocurrency jargon. Due to the significance of this word to an investor's trading, SCB 10X will give you more information about it in this article. This is another reason for the asset loss in the world of crypto that investors must be aware of.
What is Slippage?
Slippage happens when crypto traders complete a transaction at a price that is "inaccurate" or not what they anticipated. It frequently occurs and is typically observed in the volatile and quick-moving crypto market.
Slippage is not only limited to the crypto market. It is a concept borrowed from the forex and stock markets. The extremely volatile cryptocurrency market, however, can have a significant impact on crypto investors.
A case study of Slippage: A trader intends to purchase one Bitcoin for 20,000 US Dollars, but ends up shelling out 20,050 US Dollars instead. The slight difference is called Slippage. In terms of percentage, the trader loses his money by 0.25% ((-$50/$20,000) x 100)
How can Slippage occur?
There is such a large gap or time difference between placing and executing trading orders that it may lead to price volatility. The rise in demand, the rise in and lack of liquidity, or some news that agitates the market are just a few of the causes of the volatility.
However, regardless of the cause of the volatility, the short period of time is sufficient to change the price of the token, and investors cannot dispute the results. A high trading volume may have a negative impact on slippage even though the price does not change significantly enough to cause significant harm or loss. Every bit counts.
How many types of Slippage are there?
Slippage in the crypto market is common and frequently discovered by the time investors trade on the exchange. Slippage may be positive or negative.
Positive slippage occurs when the token price abruptly drops in accordance with the price set by the investors, giving them the opportunity to acquire the highest token price ever. Investors, however, may be concerned by the negative Slippage. When token prices increase during pricing and execution, their purchasing power is reduced.
How can we avoid or prevent Slippage from happening?
Investors may suffer harm or loss due to Slippage in the crypto market. As a result, the following are the basic recommendations for preventing Slippage:
- Apply Slippage Tolerance on Crypto Exchanges
Cryptocurrency exchanges have a feature called Slippage Tolerance that enables users to set their slippage at a reasonable level. For instance, investors can set in Slippage Tolerance if they can accept Slippage at 0.5%. If the Slippage value is less than 0.5%, the purchase order can still be executed. The order is automatically canceled if it exceeds. Slippage Tolerance is crucial for low-margin speculators or when prices are changing quickly.
- Avoid making investments when there is a chance of market instability
Another way to reduce the risk of Slippage is to avoid trading during times of news or significant announcements about market instability, as well as refraining from investing during times when the market is erratic due to situation error, both of which can result in significant Slippage and damage. Keeping your trading off of those times is therefore a good idea.
- Avoid market orders. Choose limit orders
The best price trading order available for tokens is a market order. Without a price guarantee, this kind of order is immediately executed without a price guarantee. On the other hand, with a limit order, the traders can choose their desired price. Most of the major cryptocurrency exchanges offer limit orders, which are automatically executed when the price of the traders' preferred Tokens matches the anticipated price.
Using Layer 2-based DEX is yet another method of preventing Slippage as it allows traders to complete their transactions even faster. The risk of Slippage and the transaction fee may be reduced as a result. Today, many DEXs continue to operate in Layer 1 Blockchain networks. The Ethereum network, for instance, directly drives most of the trading on exchanges. When Ethereum experiences a bottleneck, trading becomes sluggish, and the risk of slippage increases.