What is slippage in crypto? A Comprehensive Guide

When you trade crypto and get less (or more) than you thought, it is called slippage. Multiple things can cause this, such as price changes or a lack of liquidity. Crypto slippage is a pricey investment that may sometimes go undetected if left unchecked. Understanding this issue is crucial since it affects both centralized and decentralized exchanges. In this guide, you will discover what is slippage in crypto?. Another thing we’ll talk about is slipping and how to stop it from taking away your gains.

What is Slippage?

You can lose or make a lot of money depending on slippage, which is the difference between a trader’s planned trade and the price at the time. Let’s say you’re looking for trainers and come across the right pair they cost $100. Price has suddenly increased to $115 by the time you get to the register to pay. Slippage means the extra $15.

You can experience slippage at any time, but it happens most often when markets are unstable or orders are bigger than the platform’s handle. Anyone who trades in the crypto area needs to understand this idea because the markets are very risky, and different coins have different levels of liquidity.

Why Does Slippage Happen?

Different factors can cause slippage in crypto deals, including changes in price and availability, which refers to the amount of an object that is available at a certain price. What makes a difference is the size of your order. Sometimes, bigger sales slip because there isn’t enough stock to meet your price. Because of this, some of the orders “slip” into a different price band. The two main kinds of movement that can happen are shown below.

Types of Slippage

Many different types of slippage can happen, and each one has its effects on buyers.

Positive Slippage

A sale goes through at a better price than expected, called positive slippage. When a commodity is bought for less than predicted, thus saving the seller money, this is called a “buy order.” When the commodity is sold at a higher price than expected, making the seller a bigger profit, this is called positive slippage for a sell order.

Traders who trade on platforms with high volume and fast order processing will experience trading slippage when the price of an asset drops quickly in a market that moves quickly. Negative slippage can make it harder for high-frequency traders to make money over time, even if the price difference doesn’t seem much.

Negative Slippage

Suppose the market price changes badly before a trader’s order is met. In that case, this is called negative slippage, making the trade less profitable. It means that you will pay more than expected for a buy order and less than what sellers sold the object for a sell order. Negative slippage is caused by several things, such as:

When prices change quickly, like they do in the crypto space, it can be hard to fill orders at the price that was wanted.
The price of an object can change a lot when there aren’t many buyers or sellers. This is called “low liquidity.” Because of this lack of liquidity, traders are more likely to lose money when there are bigger gaps between buy and sell orders.

Buyers can lose money when negative slippage happens. This is a very important thing to think about, especially in markets that move quickly or aren’t very open.

What Makes Crypto Markets Slip

As we already said, high volatility and low liquidity are the two main reasons crypto markets slip. That being said, traders must also think about the following:

High Trading Volume: The market price can change quickly if there is a fast rush of buy or sell orders, such as after news events. Even small orders can sometimes get pushed back because filling them at the price they want during these busy times is hard.

Order Book Depth: When there aren’t many orders at different price levels in a small order book (a list of buy and sell orders), slippage can happen, especially for bigger trades. A partial order will be filled at prices that worsen as time goes on if there aren’t enough orders to fill the whole order at the desired price.

Time Delay: Prices can change a lot in the crypto market in a matter of seconds, meaning an order might be met at a different price than originally planned.

Trading in crypto will be easier for those who understand these extra factors. They will help them predict and deal with errors.

What is Price Slippage?

The price of a coin changes before your order goes through, which is what price slippage means. For instance, Bitcoin is worth $60,000 when you place your order. The price will now be $60,200 when your order goes through. The prices won’t change much if you buy less. You might pay hundreds more than you thought for a bigger order because of the difference.

It’s also possible that you’ll get less than you thought you would. This can happen when you buy with limited dollars or trade two risky assets, like BTC and PEPE. For sliding to happen, prices must move on both sides of the pair.

What is Liquidity Slippage?

The term “liquidity slippage” describes the situation in which the quantity of liquidity available at a certain price point causes a trade’s anticipated quantity to vary. Take BTC as an example. Its current price is $63,305, as shown below. Thinking you will get 0.1 BTC, you put in an order for $6,330.50. Next open bids, on the other hand, are set higher than the most recent selling price.

0.00570343 BTC at $63,324.80
0.02210872 BTC at $63,238.70
0.0105436 BTC at $63,328.90
0.08845428 BTC at $63,331.30

Each open sell order must be filled before the 0.1 BTC market order can be filled. You get some Bitcoin at each level as you take cash from each open order. The biggest amount is at $63,331.05 instead of $63,305.

The order couldn’t be filled at the expected price of $63,305 because there wasn’t enough cash. Even though the price was better than expected, you’ll get less than 0.1 BTC from the deal. How much volume there is at a goal price can also make slippage much higher. These are the six best ways to keep crypto from sliding.

If you want to keep more of your trade gains, there are a few things you can do to control loss. One way to help keep crypto slippage costs low on centralized exchanges is to use limit orders. Another way is to use other techniques on both centralized and decentralized platforms.

Like, you can pay attention to trading pairs with many trades. You can also space out your sales to keep the market from drying up too quickly.

Set stop-loss orders

It was shown earlier that slippage can happen when you use a market order. Price changes happen on the market, not at a set price when a market order is filled. The market will decide the price of your order with a limited order, but you can also wait for the market to come to you.

But there’s also the possibility that the market may change its mind and go against your price. Even though your order might not go through, you can find a price that will go through without any loss if you look at the trade range. Buyers in the market take the money you put in a limit buy order. Buy orders take the cash when there is a limit on sell orders.

To limit orders, you must use advanced trade tools in a centralized crypto market like Coinbase or Binance. Other than spreads (markups) and higher fees, simple buy sites often don’t offer this option. Some decentralized markets, like Uniswap, do not allow limited orders either.

Set a Suitable Slippage Tolerance

Slippage is usually higher on a DEX like Uniswap than on a controlled market. A DEX uses an automated market maker algorithm to modify prices and maintain the liquidity pool’s equilibrium. This usually implies that you will have greater slippage the more you purchase or sell in a single trade. For example, the slippage appears in an ETH/PEPE trade on the Base network.

0.1 ETH: 1.47% Slippage
Slippage for 0.5 ETH is 2.38%

If you keep an eye on the trade amount, however, if someone else is selling at the same moment as you are purchasing, there is little or perhaps no slippage. I suggest waiting a minute or two.

Both trade activity and volatile markets influence DEX slippage. As an example, if trading activity is strong, the price of a well-known meme currency may rise swiftly. Fortunately, you can adjust the slippage for your swaps using DEXs like Uniswap.

In this case, the swap’s slippage charges are 2.36%, or almost $70. A parameter may be adjusted to stop swap errors with unacceptable slippage.

To see the slippage options, click the settings gear icon. Note: Because of the selling activity, this scenario has positive slippage. In a moment, more on it. Slippage occurs in both directions, so you should probably avoid unintentional slippage that goes against you.

Next, choose a custom slippage percentage that suits your transaction by selecting it. For this instance, we went with 1%. You can suffer unsuccessful transactions (but still have to pay network costs) if you choose a slippage value that is too low.

Use Trading Pairs with High Liquidity

Lower slippage is offered by trading pairs with more buying and selling liquidity. Both centralized and decentralized exchanges may benefit from this. Pairs like BTC/USDT or ETH/USDT provide the required liquidity for buyers and sellers. Still, newer or exotic tokens may not have enough to trade effectively. Trades with less price effect are permitted with popular trading pairs.

Trade During Periods of Low Volume

Another factor to consider is the time of day you trade. When fewer people are around, trade is feasible, especially for DEX transactions when busy periods may cause prices to change fast. While cryptocurrency is always trading, the busiest periods for trading tend to coincide with US stock market opening hours. Immediately after the market closing, trading volume is often lower before increasing later in the evening. After 9 p.m. EST, activity decreases once again and continues to do so until dawn.

Selecting the ideal moment to trade cryptocurrency may help you avoid price slippage and save money on network costs if you trade on a DEX.

Use Trading Tools

Using crypto tools, you can plan your entry and exit points and optimize your trades to reduce trading slippage.

View liquidity: The key is plenty of liquidity. Before completing a transaction, you may assess the price effect of potential deals using trading tools such as Messari. Token liquidity statistics are provided by DEX programs such as Dexscreener, Dextools.io, and GeckoTerminal.

Avoid frontrunning bots: Additionally, frontrunning, or maximum extractable value mining, may be minimized using the DEX you choose. Slippage settings are applicable in this context as well. If your slippage settings make your swap susceptible to bots who “cut in line” ahead of you and take a portion of the deal, many DEX platforms alert you.

Stagger Your Orders

Slippage may result in larger deals. Dividing the deal into many smaller trades is a preferable course of action. For advanced orders, centralized exchange costs often use percentage-based trading fees; therefore, this strategy avoids penalties for higher trading expenses. But gas taxes are part of every DEX exchange, whether big or small. Consider your alternatives to the possible slippage for the swap since network costs might mount up.

Centralized Exchanges (CEXs) Slippage

Both centralized and decentralized exchanges may have slippage; a CEX usually provides more security against such risks.

Higher liquidity: Higher liquidity results from centralized exchanges, the most widely used trading method, especially on well-known platforms like Binance or Coinbase.
Order book model: Exchanges employ an order book model that provides more transparency and lets you structure your deals to minimize slippage.
Limit orders: By establishing your price, limit orders enable you to remove slippage completely.
Quicker transaction speeds: By maximizing quick deal execution, centralized exchanges reduce the chance of price slippage.

Although the chances of slippage are still lower for centralized exchanges, customers have complained about CEX platforms because of this problem.

Slippage on Decentralized Exchanges (DEXs)

Trading on DEXs might be riskier due to decreased liquidity and their automated market maker algorithm. The DEX’s market statistics website, Uniswap Info, indicates that ETH has $772 million in daily trading activity. This amount is dwarfed by the trading volume on Binance alone, which is close to $1.1 billion in 24-hour trading activity.

DEXs often have less liquidity. Higher slippage might result from less liquidity.
An AMM is used by DEX platforms: While a DEX’s automated market maker (AMM) process helps to maintain pool equilibrium, it may also increase slippage and cause problems with centralized exchange pricing.
Slower transactions: During strong trading activity, transactions often take longer to confirm, which raises gas prices and may permit more price slippage.

FAQ

A trading slippage is the difference between what you expected to get out of it and what you actually got out of it. Slippage in crypto can be either positive or negative. Negative trades hurt your profits, while positive trades give you more than you expected.

The slippage percentage represents the price change for a particular asset. It is important to remember that slippage sizes are often modest. It is normal to see slippage between 0.05% and 0.10%. A significant amount of 0.50% to 1% slippage might occur under erratic conditions. Investors need to understand the financial implications of this.

A slippage of 2% or more is regarded as very harmful.

Indeed, slippage is crucial to consider while trading and investing in cryptocurrencies. Traders should always attempt to minimize and calculate slippage before engaging in any trades.

Since high slippage indicates an exceedingly volatile market, it is often seen as a poor indicator while trading.

Whether you’re feeling positive or negative slippage will determine how things turn out.

The price differential is not in your favor if there is negative slippage.

Not at all; rather, it’s the gap between the accomplished price and the desired price.

Your trading objectives will determine this; thus, you should adjust the slippage tolerance % appropriately.

High slippage usually happens when there is insufficient market liquidity to instantly match a trader’s order, which happens in high-volatility markets.

Little slippage fosters a favorable trading environment.

For popular trade pairs, slippage on organized platforms is usually less than 0.5%. However, instability can cause slippage to be higher. A lot of the time, slippage on autonomous platforms is between 0.5% and 3% or more.

Take the expected price away from the performance price to find the loss on your deal. It’s then time to split by the expected price. To find the loss as a percentage, multiply the whole number by 100.

Not at all. If you slip, it can go either way. When you get more from a deal than you expected, this is called positive slippage.

Limit orders are the best way to avoid loss when using a controlled exchange. You can use this type of order on more complicated trading sites. It lets you set a fixed price for your trade, which gets rid of volatility.

Conclusion

Both centralized and decentralized exchange trading face the problem of crypto slippage. However, DEX swaps may experience it more often because of their reduced liquidity. Limit orders may be used on centralized exchanges, removing the possibility of slippage. Look for trading pairs with strong liquidity to reduce slippage in cryptocurrency trading. You can also trade after US stock markets shut to prevent volatility during busy trading hours. To maximize your transactions and utilize less market liquidity at a time, you may also think about staggered orders.