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What Is Slippage In Crypto?

May 20, 2022

The Definition of Slippage in Crypto

What does slippage mean in crypto? Slippage can be defined as the difference in price that occurs in the timeframe between the beginning of an order and its execution.

This can happen every time you buy an asset at its market price: the influence of the combined force of supply and demand affects the price of the asset. The smaller the volume and the fewer the participants, the more volatile the price of a specific asset can be.

Cryptos are not different: their prices are almost exclusively driven by supply and demand, so they can be affected by slippage, which is strictly related to volatility. But let’s see how slippage works.

How Does Slippage Work?

Every trader knows that buy and sell orders are not immediate: even if modern platforms are quite intuitive and fast, you still need to perform a few actions before your order is ready.

You need to select a pair, set the amount of cryptocurrency you want to buy or sell, evaluate a good moment to start, and if you need them, you have to set conditional closing positions before the order is executed.

Moreover, it’s not sure that your full order is executed at the same price: if the market is not liquid enough, just a fraction of your order will probably be executed at the price you saw.

During this time, even if it can last less than a minute, the price of the asset can change, and you’ll end up paying a price you weren’t ready to predict. But it’s not always a negative thing.

Positive vs. Negative Slippage

There are different types of slippage: crypto trading may sometimes be improved by slippage, while sometimes this phenomenon can negatively affect your activity.

That’s why it’s common to divide slippage into two categories – positive slippage and negative slippage.

Negative slippage occurs when, for instance, you want to create a buy order, and the price of the asset you chose increases before your order is executed. The same happens when you create a sell order and the price of the asset suddenly decreases. In these cases, we talk about negative slippage because your capital is suddenly reduced, even if you didn’t expect to face this kind of issue.

BTC/USD 1-minute price chart. Source: TradingView. Example of negative slippage in case of a sell order.

On the other hand, when you start a buy order and the price of the asset decreases, or if you start a sell order and the price increases, we talk about positive slippage. It’s positive because the market creates more favorable conditions for your trading activity.

Let’s see some practical examples of slippage.

Slippage Examples

In crypto, what is slippage? To better explain this phenomenon we want to give you some examples and we’ll use the first crypto – Bitcoin.

Let’s say you want to trade the BTC/USD pair on a centralized exchange with no leverage. Let’s say – just by way of example – that BTC is worth 30,000 USD.

You start your order with these details:

Market order;
1 BTC.

As we said, when you see the chart and the order book the price is 30,000 USD, and you want to use the easiest and fastest order available – the market price order won’t require you to set any other specific details. If you don’t want to set closing order conditions either, you can just leave the default “Good till cancelled”. Given these details, the platform will buy your Bitcoin at the market price and complete your order even if some fractions of your Bitcoin have to be bought at a higher price.

And here’s where slippage can affect your trade. If the price of Bitcoin suddenly rises by 2%, even if the platform manages to complete your full order at the market price you end up spending 30,600 USD (plus fees). This is an example of negative slippage.

Now, let’s consider the sell order maintaining the same initial data.

You bought your BTC at 25,000 USD and you want to sell it at 30,000 USD – the market price.

If BTC experiences the same increase in price, you end up earning more than you expected. This is an example of positive slippage.

BTC/USD 1-minute price chart. Source: TradingView. Example of positive slippage in case of a sell order.

Why is Slippage Common in Crypto?

Crypto slippage is very common simply because this asset class is extremely volatile.

To better understand this point, consider that volatility is the main cause of slippage and that volatility in crypto is extremely common for many reasons, among which:

There is no central, unique market where all the units of the same crypto are included and can be traded;
Because the force that guides prices mainly relies on supply and demand;
Because there are still not as many participants as in more traditional markets.

All this increases volatility, but let’s see why.

Bitcoin volatility chart.

Each exchange, each liquidity pool, is a single market – this doesn’t favor liquidity. Let’s define liquidity as the ease with which traders can buy and sell assets at a given price.

If there are not enough participants, liquidity decreases, and this makes it easy for single participants to influence the market – as it happens, for instance, with penny stocks.

This means that even small actions can dramatically affect the price of an asset and that the timeframe during which this dramatic change occurs is reduced.

But there are some measures you can take to avoid (negative) slippage.

How to Control Slippage When Trading Crypto

After understanding what slippage is in crypto, it’s useful to understand how it can be controlled.

The first and most intuitive system to avoid slippage is to use limit orders, a feature you can find on exchanges when using, for instance, spot trading.

Limit orders are trading operations that allow you to set a specific price at which you want to buy or sell: if you set a specific price, your trade won’t be executed if your conditions aren’t met.

This is the easiest way to avoid slippage, but it has downsides. Your trade may never be executed, or it may be executed just in part at the price you set.

To execute the whole trade, you may choose Fill-Or-Kill (FOK) orders, to tell the platform you’re using to execute the entire order or to cancel it.

This level of control is possible only on CEXs. These types of exchanges have an order book (a central database of all orders) which simplifies the process of matching orders.

But if you want full control over your asset and you’re willing to sacrifice simplicity and support for that, you should choose decentralized crypto exchanges.

In this case, avoiding slippage is harder, since these platforms replace order books with independent markets called liquidity pools.

But here you can also take some measures to avoid high levels of slippage. For instance, you can choose pools with high liquidity – for the reasons we mentioned above, liquidity is one of the best tools against volatility and slippage. Usually, these kinds of platforms show you the predicted level of slippage, to make it easier for you to filter them and set up your trading strategies according to your slippage tolerance.

Moreover, there are crypto assets that avoid slippage by nature – stablecoins, cryptocurrencies whose value is pegged to some fiat currency, like USDT.

Top stablecoins. Source: CoinMarketCap.

Recently, stablecoins – even the first stablecoin by market cap – suffered a shock that made analysts ask for further regulation.

Conclusion

What is crypto slippage? The definition of slippage can be formulated as the difference in price experienced by crypto assets in a very short time – like the one that exists between the start and the execution of an order.

Strictly related to volatility and, more in general, to liquidity levels, slippage isn’t always something bad: actually, you can find both negative and positive slippage examples, and the latter is particularly appreciated by traders who look for speculative occasions.

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