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Slippage in crypto is the same thing as slippage in traditional finance. Slippage refers to the difference between the anticipated price of a trade and the price at which the trade is actually executed. Slippage can be both positive and negative, and while it is impossible to avoid slippage altogether, there are ways traders can minimize the impact of negative slippage, such as limit orders and setting a slippage tolerance. It is not an uncommon occurrence in the crypto market, given the rapid fluctuations of the market between the time the order is placed and the time it is executed. By way of example, slippage can be calculated as follows:
Slippage = ((Executed Price−Expected Price)/Expected Price) × 100
In this article, we take a closer look at the causes of slippage in crypto, how to minimize the impact, and other tools and strategies traders use to protect their positions in the crypto market.
What are the causes of slippage in crypto
Slippage in crypto trading is normal, and something traders should be aware of, especially given the fast-paced nature of the market. Once again, it’s the gap between what traders expected to pay or receive for a specific crypto, and what they actually end up paying or receiving. Slippage can occur when buying or selling, on both centralized (CEX) and decentralized exchanges (DEX). The main causes of slippage include high market volatility, limited liquidity and big trades. For example, rapid price movements can shift the market between the time an order is placed and when it’s executed.
Low liquidity can also contribute to slippage in crypto. This refers to when there are not enough buy or sell orders for a particular cryptocurrency at the current market price. In crypto, this can be common with smaller or less frequently traded tokens, such as low-cap altcoins. In these situations, even modest trades can move the market price, causing an order to be filled at a less favorable rate. Larger trades can also consume available liquidity at a specific price level, forcing the platform to fill the rest of the order at progressively worse prices.
How to minimize the impact of slippage
While slippage in crypto cannot be completely avoided, there are strategies traders can use to reduce its impact. One of the most reliable methods is using limit orders instead of market orders. A limit order gives traders control over the exact price at which their trade executes, helping to avoid sudden price changes. It is also recommended to trade during periods of high liquidity, such as when major markets like the U.S. or Europe are active, as it can reduce price volatility and narrow the bid-ask spread.
Other useful strategies include setting a slippage tolerance. A slippage tolerance will limit how far from a target price traders are willing to go before the trade is rejected, which is particularly important on decentralized exchanges. Breaking large orders into smaller ones can also help mitigate the impact of slippage, especially when trading low-liquidity cryptocurrencies, such as low-cap altcoins, as mentioned above. Finally, keeping a close eye on market conditions and avoiding trading during periods of extreme volatility can significantly help to reduce the likelihood of unfavorable executions.
Other tools and strategies to protect crypto positions
To protect positions in the fast-moving crypto market, traders rely on essential risk management tools, such as stop-loss and take-profit orders. These automated triggers help limit losses or lock in profits by closing positions when prices hit predefined levels. A stop-loss order is designed to limit losses, and works by setting a price below the current market value, and if the crypto’s price drops to that level, the exchange will automatically sell it. For example, Trader X buys Bitcoin (BTC) at $30,000 and sets a stop-loss order at $28,000. If the price of BTC falls to $28,000, the position is sold, preventing further losses.
A take-profit order is used to lock in profits once a crypto trade reaches a certain level of gain, and automatically closes the position when the crypto hits the target price. For example, Trader X buys Ethereum (ETH) at $2,000 and sets a take-profit order at $2,400. If the price of ETH reaches $2,400, the trade will be closed, securing Trader X’s profit. Other common strategies include position sizing, which involves carefully choosing how much capital to allocate to each trade to avoid overexposure. Portfolio diversification is also a key strategy and helps spread risk across multiple assets, which can mitigate the impact of sudden market drops.
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