Understanding Bid, Ask, and Slippage in Crypto Markets

Key points

• The bid is the highest available purchase price, while the ask is the lowest selling price: the gap between the two is what we know as the spread.
• Slippage occurs when a transaction is finalized at a price different from what you expected, usually due to a lack of liquidity or sudden market movements.
• Reduced spreads and lower slippage often indicate markets with better health and greater order depth
• Both concepts are essential for calculating the true cost of operating beyond what you see in commissions.

Introduction: How Prices are Formed in Crypto Exchanges

In cryptocurrency trading platforms, each transaction depends on the dynamic balance between buyers and sellers. Prices are not static: they constantly respond to changes in trading volume, asset availability, and current volatility.

When you place a buy or sell order, you engage in an implicit negotiation with other traders. This interaction creates price differences that directly affect what you end up paying or receiving. Understanding how the bid and ask work will allow you to anticipate hidden costs and make more informed decisions.

The order book is your best ally here. Consulting it before executing large volume trades can save you unpleasant surprises and help you identify if the market has enough liquidity to absorb your order.

Breaking Down the Concept: Bid and Ask

The bid represents the highest price that someone is willing to pay for an asset at this moment. The ask, on the other hand, is the lowest price at which someone is willing to sell. The difference between the lowest ask and the highest bid is the spread.

Let's imagine a concrete example. If the current bid is 9.43 USD and the ask is 9.44 USD, that differential of 0.01 USD is what the market maker captures as arbitrage profit.

In traditional markets, brokers and dealers create these spreads. In cryptocurrencies, they arise naturally from the clash between limit orders from buyers and sellers.

Why do spreads vary by asset

Assets with high trading volume exhibit much tighter spreads. Bitcoin, being the most traded cryptocurrency, experiences minuscule percentage differentials even when the dollar differential seems insignificant.

Consider this contrast: if Bitcoin had a spread of 1 USD at a price of 120,000 USD, the percentage differential would be approximately 0.000833%. In contrast, less active coins may experience percentage spreads exceeding 0.5%.

The mechanics of market makers

Liquidity doesn't appear out of thin air. Financial markets need intermediaries to ensure that there is always a counterparty to trade with. These intermediaries are the market makers.

A market maker simultaneously offers to buy at one price and sell at another slightly higher price. This strategy, repeated hundreds of times a day with large volumes, generates significant profits even in reduced spreads.

To compete, several market makers may cut their spreads, indirectly benefiting traders. With more demand and competition, spreads automatically tighten.

Depth of the order book: A practical visualization

On many trading platforms, you can access depth charts that visually display the entire price structure. Green colors typically represent buy orders (bids) with their respective prices, while red shows sell orders (asks).

The separation between the green wall and the red wall is the visual bid-ask spread. A chart with tall and wide vertical walls indicates good liquidity. A chart with thin walls or large gaps between them suggests shallower markets.

Observing this pattern before trading gives you an immediate idea of how much available liquidity exists at each price level.

Calculating the spread percentage: A comparative metric

To objectively assess whether a spread is attractive, we use the percentage method:

(Ask price - bid price) ÷ ask price × 100 = Bid-ask spread percentage

Let's take TRUMP as a reference. With an ask of 9.44 USD and a bid of 9.43 USD:

0.01 ÷ 9.44 × 100 = 0.106%

This same calculation applied to Bitcoin with a spread of 1 USD:

1 ÷ 120,000 × 100 = 0.000833%

The pattern is clear: more traded assets, proportionally tighter spreads.

What is slippage and why does it matter

Slippage is what happens when your order is filled at an average price different from what you requested. It occurs because the market does not have enough depth at the desired price level.

Suppose you want to buy 10 BTC at market price when the current ask is 50,000 USD. If there are only 2 BTC available at that price, the system will automatically take the next 8 BTC from higher orders (50,010 USD, 50,020 USD, etc.). Your final average price will be higher than the initial 50,000 USD.

In decentralized exchanges and Automated Market Makers, slippage is even more pronounced because pricing is determined by mathematical equations and the depth of the liquidity pool, not by a traditional order book.

Slippage Variations

Negative slippage (the most common)

It's when you end up paying more ( in purchases ) or receiving less ( in sales ) than expected. This is the norm in volatile or illiquid markets.

Positive slippage (the surprising)

Occasionally, while executing your order, prices move in your favor. You buy cheaper or sell more expensively than anticipated. It's rare but it happens in highly volatile markets.

Tolerance Controls: Setting Limits

Many decentralized platforms allow you to set a maximum acceptable slippage level before execution. You are telling the system: “process my order only if the final price does not deviate more than X%”.

The Paradox of Tolerance: A very low maximum slippage can cause your order to never be completed or to wait indefinitely. A very high maximum slippage attracts bots and traders who practice frontrunning: they see your pending order, jump ahead by paying higher gas, and then sell you the asset at the maximum price you would be willing to pay.

Practical strategies to reduce slippage

Fragment large orders

Instead of executing a massive purchase at once, break it down into smaller blocks. Constantly monitor the order book to adjust the size of each block according to the liquidity available at each level.

Consider transaction costs

In congested networks, gas fees can reach amounts that exceed the savings you would achieve by optimizing slippage. Assess whether it is worth trading at that moment or waiting for better network conditions.

Prefer assets with depth

If you have flexibility, avoid trading pairs with low volume. A small liquidity pool or a pair with few traders will significantly multiply your slippage.

Opt for limit orders

Unlike market orders, a limit order only executes at the price you specify or better. You may have to wait longer for it to fill, but you completely eliminate the risk of unexpected negative slippage.

The Hidden Cost of Not Paying Attention

For small traders, the cumulative impact of the spread and slippage may go unnoticed. But when you trade with significant volumes, those seemingly insignificant percentages turn into real monetary losses.

A trader operating 100 BTC in an illiquid asset could face a slippage of 2-3%, while the same volume in BTC barely generates 0.01% slippage. The difference in performance is staggering.

Understanding these mechanisms not only protects you from surprises: it opens up opportunities to trade more intelligently, selecting pairs with better liquidity and timing your trades at moments of greater market depth.

When you enter cryptocurrency trading or decentralized finance, remember that each transaction has visible and invisible costs. The bid-ask spread and slippage are natural market taxes, but with strategic knowledge, they can be significantly minimized.