Every crypto trader has experienced moments where the final execution price of a trade is not what they expected. This gap between the intended and the actual price often confuses beginners, especially when it impacts their profits or losses. In the world of cryptocurrency, this phenomenon is known as slippage.
Slippage is a normal part of trading, but it can affect both small and large investors in different ways. It can sometimes work in your favour, giving you a better deal, but it can also move against you and reduce your returns. In this article, we will break down what slippage is, its types, causes, and ways you can minimise its effect while trading crypto.
What is Slippage in Crypto?
Slippage refers to the difference between the price you expect to pay or receive for a trade and the price at which the trade is actually executed. This usually happens because the market is moving rapidly or because there is not enough liquidity to fill your order at the expected price.
It can be either positive or negative. Positive slippage occurs when your trade is executed at a more favourable price, while negative slippage means you end up with a worse deal than expected. In crypto markets, where prices change quickly, both outcomes are possible, making slippage an important concept to understand for all traders.
Types of Slippage in Crypto
Slippage can occur in different ways, each shaped by market conditions and liquidity. Understanding its main types helps traders identify risks and adapt strategies more effectively.
Price Slippage
Price slippage happens when rapid market movements cause trades to execute at a different price than expected. This often occurs during periods of high volatility, where prices shift within seconds, affecting execution outcomes.
Liquidity Slippage
Liquidity slippage occurs when there are not enough buyers or sellers at the desired price level. As a result, trades get executed at less favourable prices, especially when dealing with large orders.
The second method involves sending Bitcoin to an external wallet address, which requires you to enter a valid Bitcoin address (a string of alphanumeric characters beginning with 1, 3, or bc1). This method is essential when you need to send Bitcoin to cryptocurrency exchanges, hardware wallets, or any Bitcoin address outside the Cash App ecosystem. Each method has different fee structures and processing times, so choosing the appropriate option depends on your specific needs.
Causes of Slippage in Crypto
Slippage occurs for several reasons, often linked to market conditions and trading environments. Identifying these causes allows traders to manage risks better and make more informed trading decisions.
Market Volatility
High volatility in cryptocurrency prices means they can change drastically within seconds. This rapid movement often results in orders being filled at a different price than intended, creating slippage.
Liquidity
Low liquidity means fewer buyers and sellers are available at specific price levels. This lack of market depth can force orders to be executed at less favourable prices, causing slippage.
Order Size
Large trade orders can impact prices as they are filled in smaller chunks. This partial execution at varying price points increases the risk of slippage, particularly in less liquid markets.
Network Congestion
During periods of heavy trading activity, blockchain networks or exchanges can become congested. Delays in processing transactions can cause trades to settle at less favourable prices, contributing to slippage.
Impact of Slippage on Traders
Slippage is more than just an inconvenience; it can directly change how trades perform and affect overall strategies. Both small and large traders experience its effects, but in different ways.
Effect on Retail Traders
For individual traders, slippage often results in buying coins at higher prices or selling them for less than expected. These small differences can reduce profits significantly, especially when repeated across multiple trades. Retail investors must factor in slippage while planning entry and exit points to protect their earnings.
Effect on Institutional and High-Volume Traders
For institutions or traders handling large volumes, slippage poses an even bigger challenge. Large orders often move prices, creating unfavourable execution conditions. Over time, this can distort strategies and reduce returns. To manage this, high-volume traders usually rely on advanced tools and liquidity providers to limit the effect of slippage.
How to Minimise the Impact of Slippage in Crypto?
While slippage cannot be avoided completely, there are effective ways to limit its effect. Using the right tools and strategies helps traders reduce losses and improve trade outcomes.
Use Limit Orders
Limit orders allow you to set the maximum price you are willing to pay or the minimum price you are willing to accept. This prevents trades from executing at unfavourable prices. Although the order may not always be filled, it provides greater control and protects you from unexpected market movements.
Set Slippage Tolerance
Most trading platforms let you set a slippage tolerance, which defines the maximum deviation you will accept between the expected and executed price. If the slippage exceeds your limit, the order is cancelled. This feature is especially helpful in decentralised exchanges where volatility and liquidity issues are more common.
Trade in High Liquidity Market
Trading in markets with high liquidity reduces the risk of slippage. High liquidity ensures there are enough buyers and sellers to fill your order at the intended price. Choosing popular trading pairs and executing trades during peak activity hours can further improve the chances of securing favourable execution prices.
Avoid Trading Around Major News Events
Market-moving news often leads to rapid price swings, creating conditions where slippage becomes unavoidable. By avoiding trades during such periods, traders can protect themselves from sudden losses. Waiting for the market to stabilise before placing orders ensures that trades are executed in calmer conditions, reducing the likelihood of large price gaps.
Slippage on Decentralised Platforms
Decentralised platforms often face higher slippage compared to centralised ones. This happens because they typically have lower liquidity and depend on automated systems for trade execution.
Why Slippage Is Common On DEXs?
On decentralised exchanges, trades are facilitated through smart contracts and liquidity pools rather than order books. When liquidity pools are small, even moderate trades can shift prices significantly. This makes slippage more frequent and sometimes more severe, especially when trading less popular tokens with limited participation.
Using Maximum Slippage Settings
To protect traders, many decentralised platforms allow users to set maximum slippage limits. If the price moves beyond this defined threshold, the trade does not execute. This safeguard prevents traders from incurring larger-than-expected losses, making it a practical tool for navigating volatile and illiquid decentralised markets.
Conclusion
Slippage is a common part of crypto trading that every investor must understand. While it cannot be avoided entirely, recognising its causes, types, and impact helps traders prepare better. By applying smart strategies, slippage can be managed effectively without disrupting long-term goals.
Managing trades and monitoring slippage is easier with the right tools. KoinX helps by automatically tracking your trades, giving accurate insights, and simplifying your tax reporting. With KoinX, you can stay focused on building your strategies while reducing the stress of manual tracking. Join KoinX today and take control of your crypto journey.
Frequently Asked Questions
Does Slippage Affect All Cryptocurrencies Equally?
No, slippage affects each cryptocurrency differently depending on its liquidity and trading volume. Popular coins like Bitcoin and Ethereum usually face lower slippage compared to less traded altcoins, where limited buyers and sellers create greater price deviations.
Can Automated Trading Bots Reduce Slippage?
Yes, automated bots can help reduce slippage by executing trades faster than manual methods. They respond instantly to market movements, ensuring orders are filled quickly. However, bots cannot eliminate slippage completely, especially during extreme volatility or network congestion.
How Does Slippage Differ In Spot vs Futures Trading?
In spot trading, slippage occurs due to price fluctuations between order placement and execution. In futures trading, it can also be influenced by funding rates and leverage, making the risk higher. Futures traders need stricter risk management to minimise slippage.
What Is An Acceptable Slippage Tolerance In Crypto?
Acceptable slippage tolerance varies with trading strategy and market conditions. For highly liquid pairs, traders often set 0.1% to 0.5% tolerance. In less liquid markets, a higher tolerance may be necessary to ensure execution.
Can Small Traders Avoid Slippage Completely?
Small traders cannot avoid slippage entirely, but they can minimise it. Using limit orders, trading during peak hours, and sticking to liquid pairs reduces risk. Even with these strategies, minor slippage is still part of crypto trading.
Does Slippage Happen More On Centralised Or Decentralised Exchanges?
Slippage is more common on decentralised exchanges because of lower liquidity in their pools. Centralised exchanges usually have deeper order books, reducing the risk. However, during volatile conditions, both types of platforms can still experience slippage.
How Do Market Makers Influence Slippage?
Market makers provide liquidity by placing buy and sell orders, which reduces the chance of slippage. Their presence helps stabilise prices and ensures orders get filled quickly. Without active market makers, traders face wider spreads and higher slippage.
Is Slippage Unique To Crypto Or Common In Other Markets Too?
Slippage is not unique to crypto; it exists in all financial markets, including stocks, forex, and commodities. However, crypto’s higher volatility and often lower liquidity make it more frequent and noticeable compared to traditional assets.
