Crypto slippage and how to avoid it

Of CNBCTV18.com 26 August 2022, 07:17 IST (published)

Crypto markets are highly volatile. The price of a token can fluctuate wildly within minutes. In this article, we’ll learn about one side effect of such volatility known as slippage, how it affects traders, and what you can do to protect yourself from its harmful effects.

What is sliding?

When you buy cryptocurrency on an exchange, the price you order is rarely the executed price. This difference between your expected price and the price at which the contract closes is called slippage.

Slippage is not limited to the crypto market. It is a concept borrowed from the currency and stock markets. However, due to the volatility of digital assets, it tends to have a greater effect on crypto traders.

How does sliding work?

The time difference between the submission of orders and the execution of orders provides enough time for fluctuations in prices to occur. This fluctuation can be the result of increased demand, increased liquidity or some news that has created a stir in the market.

In any case, the short gap between the order and its execution is enough for the symbolic price to change, leaving the trader to deal with the consequences. Although prices usually do not fluctuate enough to result in significant losses, slippage can have negative effects when your trading volumes are high and everything matters.

Types of slippage

1. Positive slippage: This happens when the price of the token drops when the order is executed. It ensures that you get the asset at a lower price.

2. Negative slippage: This kind of slippage worries traders. It occurs when the price of the token has increased between order placement and execution, reducing the purchasing power of your money.

Both types of slippage also apply when you sell tokens on an exchange.

The solutions

Now that we know what slippage is, how it occurs and its types, let’s learn some ways you can avoid slippage and the losses that come from it.

Move away from market orders to limit orders: Market orders will buy or sell tokens at the best available price. This type of order is usually executed immediately, but the price at which it is executed is not guaranteed. On the other hand, limit orders allow you to specify the price at which you can buy or sell a token. Every major crypto exchange has the limit order option, where trades are executed automatically when the desired token is available at the desired price.

Use slip tolerance: Slippage tolerance is a feature in some of the new crypto exchanges that allows you to set a percentage of slippage that you can handle. If you’re okay with a 0.5 percent slip, you can add that as the slip tolerance and the order will go through if the slip is below that. If not, the order will automatically be cancelled. This feature is important when minute price changes matter or if you are an arbitrage trader and margins are already small.

Avoid trading in turbulent times: Whether a major announcement is around the corner, or the market is sentimental about a crash or something else happening, it’s best to avoid trading. The added volatility can result in massive slippage and equally painful losses.