What Is Slippage in Crypto? A Complete Guide to Understanding It
Table of Contents
- What Does Slippage Mean in Crypto?
- How to Calculate Crypto Slippage
- Types of Crypto Slippage That Exist in the Market
- Why Does Slippage Occur with Crypto Trades?
- What Is the Best Way to Prevent Slippage?
- How Slippage Can Impact Your Trading Success
- Frequently Asked Questions
- Conclusion
What Does Slippage Mean in Crypto?
Slippage in crypto occurs when the actual or intended purchase price for a token differs from the executed price. This often works against you, leading to losses in most cases. Crypto slippage can occur whether you’re buying or selling.
For instance, you plan to buy $100 worth of Token A at $1 per unit (expecting 100 tokens). Due to slippage, you receive only 50 tokens—indicating the price jumped to $2. In that scenario, the price of Token A jumped to $2 per unit, accounting for a loss of $50. Notably, slippage in crypto doesn’t have to be negative; it can also be in your favor as a trader.
How to Calculate Crypto Slippage
You might have gotten an idea of how to calculate crypto slippage earlier; however, for the sake of clarity, the mathematical method has been attached below:
There are two metrics to note: the expected price and the executed price. The expected price is the price you’re willing to pay for the token, and the executed price is the price at which the trade was finalized. To calculate slippage:
Slippage = Executed Price - Expected Price Percentage Slippage = (Executed Price - Expected Price) / Expected Price × 100
Now, let’s put this formula into action.
Buy scenario If your expected price for the trade was $4,000, but the executed price was $5,000. In this case, the slippage is $1,000. Your percentage slippage would now be $1,000 / $4,000, which is 25%. In this scenario, the slippage is in your favor.
Sell scenario If the expected price is $10,000 and the executed price is $7,000, then your slippage would be -$3,000. Your percentage slippage is 43%. This type of slippage is against you and tends to eat into your profit.
Let’s add more context to crypto slippage by discussing the different types that exist.
Types of Crypto Slippage That Exist in the Market
There are notably two types of crypto slippage in the market: negative and positive slippage, each playing distinct roles.
Negative Slippage: This type of crypto slippage occurs when the market price moves against the actual price set to purchase or sell an asset, resulting in a loss. Negative slippage results in a loss and is generally considered unfavorable for traders.
Positive Slippage: This type of slippage favors you. Positive slippage means the trade executes at a better price than expected, benefiting the trader.
You must be asking the question, why does crypto slippage occur? Well, there are multiple reasons for that, which are explained below.
Why Does Slippage Occur with Crypto Trades?
There are several reasons why slippage occurs when executing crypto trades, either leading to a loss or a gain.
High Volatility
Volatility in the crypto market simply refers to the change in price of a crypto asset within a specific period. High volatility implies that the said token changes price rapidly within a short time window.
This means a token with a high tendency to change price implies your order gets filled at a different price level than your expected target.
Low Liquidity Level
These types of movements are typically common with memecoins, sometimes referred to as ‘slippage crypto.’ A token with low liquidity implies that it can’t be easily sold or purchased, as there’s either low demand or high supply, respectively.
To put it in perspective, imagine trying to sell 10 units of Token A for $10 each. However, limited buyers in the market are bidding to pay $5 per unit. This discrepancy leads to the price to sell below the target level.
Large Size Order
In a situation where you place a large-sized order, there’s a high tendency that your position doesn’t get filled at the requested price point due to limited demand or supply.
In this type of scenario, the token is purchased across different price levels to finalize your transaction. The difference in purchase price impacts the overall trade.
Network Congestion
This situation occurs when there are more participants on the blockchain, causing transactions to be processed slowly. This delay affects the overall trade outcome.
Such scenarios often lead to major disparities between the executed and expected price, causing you to incur more loss than initially targeted.
What Is the Best Way to Prevent Slippage?
Despite slippage sometimes working in your favor, it might go against you on days you don’t expect. This is why it’s very important to know how to prevent such occurrences.
Setting Limit Orders
Slippage mainly occurs because most trades are executed using market orders—that is, whatever price the market offers, which may change before being executed in certain cases, differing from your initial target.
In a limit order, you’re simply specifying the exact price point at which you want to buy a particular token. This means the trade only gets executed at this level regardless of price fluctuation. This ensures you know exactly how much of the token you’ll receive.
Automated Trading Bots
Automated bots are technical tools that allow your trades to be executed faster than doing it manually.
These tools ensure more precision in price entry and take-profit levels. Bonk Bot is a common example, widely used among memecoin traders due to the volatile nature of the market.
Risk Management Methods
Properly managing your trade is one of the best ways to avoid crypto slippage. Effective risk management strategies include avoiding trades during high-impact news events, like the non-farm payroll (NFP), announced every first Friday of the month.
Another approach is avoiding trading during peak market periods. One way to identify these is by avoiding periods like the New York open or the Sydney open, matching them to the time on the chart. If you’re less experienced, you shouldn’t take open trades during these times.
Setting Stop Loss
Stop loss is another effective slippage management tool. This function, found on exchanges like Stobix, allows you to set price points at which you are no longer interested in holding the asset.
A good example is placing an order to purchase 10 units of a $5 token, but you also know that you can’t manage a price decline that extends beyond $4 per unit. Then you can set a stop loss at this price point, and should the price reach this level, your trade closes and your loss is limited.
Monitor Market Conditions
This is a manual method involving constant follow-up on price updates and movements to properly manage your risk and find optimal trade entries. When slippage isn’t properly managed or avoided, it causes several issues for you as a trader.
Choosing the Right Platform
The platform you use can significantly affect slippage. On most centralized platforms, slippage tends to be minimal. However, decentralized platforms often have higher slippage. Platforms like Stobix minimize slippage automatically, and some others offer a slippage tolerance option.
How Slippage Can Impact Your Trading Success
There are several ways slippage can affect your trading success, as discussed below.
Low Trading Psychology
One of the effects of experiencing constant slippage, particularly when it leads to loss, is that your trading confidence gradually wanes. This can affect your overall performance, causing you to make irrational decisions outside your strategy, likely in attempts to recoup losses.
Spike in Trading Costs
A key disadvantage of slippage is that when it goes against you, it can be costly. When the executed value remains lower than the expected value, it poses a major threat to your profitability and planning.
Lack of Trading Precision
It’s hard to remain accurate and plan trades properly with slippage in the mix. Often, this leads to missed trades or being unable to enter trades before they move in your predicted direction.
Frequently Asked Questions
What is slippage crypto tolerance?
Slippage tolerance is the maximum slippage you’re willing to accept on a trade. Typically, some platforms offer this, and you’re allowed to set the percentage you’re willing to endure if the price moves against your expected value. Some platforms support this, helping market makers execute trades close to your desired level.
Why does crypto slippage matter?
There are several reasons why you should care about slippage, including its potential to affect your profitability, trading precision, and overall psychology.
Does slippage occur on all cryptocurrencies?
Slippage occurs in all cryptocurrencies. However, it’s more common among highly volatile cryptocurrencies, as prices change rapidly in either direction. Slippage crypto, memecoins are perfect examples of cryptocurrencies likely to experience more slippage.
Does crypto slippage mean I’ll lose my funds?
No, it doesn’t. Crypto slippage, which can occur in both directions—positively, benefiting you, and negatively, hurting you—only impacts the value of the cryptocurrency during a trade.
Does the platform cause slippage?
Yes, the platform you choose can affect how often you experience slippage. You’re more likely to experience it using decentralized platforms than centralized ones. Deliberately choosing the right platform goes a long way.
What is slippage crypto?
Slippage crypto refers to assets that are highly volatile—unable to maintain a certain price level for long without significant changes. A common example is cryptocurrencies classified as memecoins, which tend to fluctuate rapidly in price because they are driven solely by speculation and lack real intrinsic value.
Conclusion
Crypto slippage can be both good and bad. Slippage introduces uncertainty into trading, and even when it works in your favor, the unpredictability can undermine your strategy.
One of the best ways to avoid this is by selecting the right platform. Stobix is one of the few platforms that allow you to control the narrative, giving you power with its decentralized features.
Stobix offers several amazing features, including its dual investment option that allows you to invest in several cryptocurrencies, including Bitcoin and Ethereum, earning up to 400% annual percentage rate (APR).