29 June 2022 • 5 min read
The term “slippage” is a common fixture in crypto trading, and, depending on how it happens, it can either be an unwelcome surprise or an unexpected bonus for a trader.
Slippage refers to the difference between the expected price of a market order and the price at which the trade is executed. The difference doesn’t have to be negative or positive for it to qualify as slippage.
In this article, we’ll dig deeper into what slippage is, how it works, why it happens, and how you can reduce or avoid it.
In simplest terms, slippage occurs when a market order is filled at a price that’s different from the requested price. It’s often regarded in a negative light, but in reality the price difference can be positive, negative, or neutral.
Slippage isn’t exclusive to the cryptocurrency market. It occurs in all types of markets, including forex, stocks, futures, equities, and bonds. However, it’s more likely to occur in volatile market conditions, which is why it’s so common in crypto trading.
When an order is executed, an asset is bought or sold on an exchange at the most favorable price available. A cryptocurrency’s market price can change quickly and that allows slippage to occur during the delay between when a trade is initiated and when it’s completed.
The final result can be equal to, favorable, or less favorable than the intended execution price. For example, let’s say Solana’s bid/ask price is posted as $28.89/$28.92 on a crypto exchange. You place a market order for 10,000 SOL tokens with the intention that the order gets filled at $28.92. There are three possible outcomes:
Neutral slippage: You submit the order and it’s filled at the best available price, which is $28.92 per token—exactly what you wanted.
Positive slippage: You submit the order and the best available price fluctuates and changes to $28.89. Your order is filled at the better price of $28.89 per token—$0.03 below your requested price, saving you $300.
Negative slippage: You submit the order and the best available price changes to $28.97 before your order is filled. Your final execution price is $28.97 per token, incurring an additional $0.05 per token or $500 in negative slippage.
Every market consists of buyers and sellers. To execute the perfect order, there must be enough buyers and an equal number of sellers. An imbalance will cause prices to fluctuate, which in turn causes slippage.
The two biggest contributors to slippage are market volatility and low liquidity. Market volatility can cause an abrupt change in the bid/ask spread of an asset. Since cryptocurrencies are volatile investments, an asset’s price can fluctuate throughout the day depending on trade volume and activity.
Liquidity refers to an asset’s availability and how quickly it can be bought or sold without impacting its market price. Trading volume is commonly used as an indicator of an asset’s liquidity.
The impact of low liquidity is most felt when you place a large order, but there isn’t enough volume at your chosen price to maintain the asset’s current bid/ask spread. An asset with low liquidity will always have a higher slippage percentage.
Slippage tolerance refers to the difference between the price you execute an order and the actual price the order will be filled that you are willing to accept. The tolerance level is set as a percentage of the total swap value.
Many trading platforms give users the option to choose their slippage tolerance level. They display a slippage estimate and average price before you execute a market order. The standard default rate on most platforms is usually 0.10% to 2%, with the option to manually adjust it to whatever percentage you like.
Slippage is inevitable in crypto trading, and it happens to every trader. While there is no way to 100% guarantee your order will be executed at your desired price, there are ways to minimize its effects.
Many crypto trading platforms have built-in settings to minimize negative slippage by preventing the price of your order from moving too far outside your chosen tolerance level.
If the price moves outside your slippage tolerance level, then the order is automatically rejected. On the flip side, if the price fluctuates in a way that is beneficial for you, then the exchange will fill the order at a better price.
Use a platform that has a slippage tolerance setting that can be adjusted as desired. For example, the decentralized exchange Uniswap has a default slippage tolerance of 0.10% that can be manually adjusted.
A standard market order buys or sells a cryptocurrency at the best available market price, and that’s generally good enough for most traders. However, there are order types designed for traders who want finer control over their activities. These order types are designed to control slippage levels and minimize volatility risk:
Limit order: A limit order is an order to buy or sell an asset that’s only filled at your specified price or better. If the best available price is worse than your chosen limit price, then the order doesn’t get fulfilled. This order type is specifically designed to limit price risks.
Stop-limit order: This is an advanced order type that has two prices: the limit price, which is the maximum price you’re willing to pay or the minimum price you’re willing to sell, and the stop price, which is the price at which the purchase or sale is triggered. This order type is for traders who are price-sensitive and want to mitigate the risk of volatility.
Unlike global stock markets, which are open from 9:30 a.m. to 4:00 p.m., the crypto market is open 24/7. However, even crypto trading has its peak hours depending on the region. You can lessen your slippage percentage by only trading during a particular region’s most active hours.
Keep in mind that blockchain transaction fees also go up during busy times due to network congestion. For example, when Ether (ETH) experiences a high transaction volume, the Ethereum network’s gas fees also rise to incentivize the miners who confirm transactions on the blockchain.
Minimizing slippage while also paying minimal gas fees for your trades will require some finesse. Fortunately, there are numerous resources like ETH Gas Station that are great for calculating potential gas fees.
Major news events can cause substantial slippage and expose you to more risk than you anticipated. Avoid executing orders during big scheduled news events like a company’s product release or new government regulation.
Check an economic calendar to see if there are any big new events planned or data releases related to the crypto market. CoinMarketCal is a good example of an economic calendar for cryptocurrency-related news.
Slippage is an unavoidable part of trading that is prevalent in every market. There is no way to completely stop it, but traders are not helpless. You can take steps to minimize your exposure.
Only trade in assets that have ample volume and liquidity, and use order types that have guaranteed limits to mitigate the effects of volatility. Many trading platforms also have settings for controlling slippage tolerance before you execute a market order.
If possible, try to limit trading activity to peak market hours. However, be mindful of higher transaction costs. Lastly, always keep an eye on an economic calendar to see if any scheduled announcements could increase your risk exposure.
Think of slippage as the cost of doing business. It can be positive or negative, but it’s often an acceptable cost, especially if you want to execute a trade quickly.