Tips for Converting Your Digital Assets- How to Avoid Slippage
Digital currencies are part of an emerging new asset class, it is typical to expect price volatility in any new asset class particularly during its evolution to maturity. As we’ve seen very recently, bitcoin’s price is $9,000 one week, then climbs to $13,000 the following week. With a constantly fluctuating price, how do you avoid slips in value during the exchange process while buying a digital asset, or selling to cashing in on your profits and put back into your bank account?
To put it simply, slippage is when the expected price for your trade turns out to be different when the trade is actually executed — whether positive or negative. It occurs in all market venues, including equities, bonds, futures and fiat currencies. It is most prominent when executing a larger order, a market priced order, or when there is price volatility in the market.
For example, perhaps you want to buy some Bitcoin (BTC) to understand and experience holding this new digital money. You don’t want to go to wild with your limited knowledge, so you start by investingMarket orders $1,000 USD — BTC is trading at $7,988.97, you do the math and your $1,000 will turn into 0.1251 BTC. Now during this trade, BTC price increases 2.7% and it is now worth 8,204.67 for 1 BTC, making the value of your trade now worth 0.1218 BTC. You’ve experienced price slippage during the trade.
There are a few different forms of slippage. One form is when placing a market order on digital currency exchanges (i.e. Binanace, Coinsquare). Market orders are placed on the market to execute when the best available price is found, with both the price and execution not being guaranteed. Due to price volatility, the asset might either increase or decrease in value during the trade, and the market order will automatically make the trade at the best available price. You will be left with either more or less of your initial value than expected.
When making large trades on an exchange, of $100K in value plus for example, the trade will be broken up into smaller chunks. Once broken up, each trade will end up being priced differently — prices quoted on exchanges represent the last price the currency was bought for, which can be misleading because not everyone on the exchange will want to trade for that same price. After a certain number of trades, there will no longer be sellers at your proposed price, and your trade will slip further from the market rate.
Another way large trades could incur slippage on is by simply hurting the limited market of the exchange- the more an asset is sold, the more the price falls. Because a large trade will hurt the exchange, the larger your order, the more slippage will occur. The chart below shows how slippage increases, the higher a trade amount.
Source: Bitwise
Limit Orders — One way to avoid slippage is through the use of limit orders instead of market orders. With a limit orders, you set either the maximum buy limit or minimum sell limit for your order and it will not be executed until those conditions are met. Though you may avoid slippage, due to the prize always changing it leaves little time for your trade to execute.
Over-the-Counter Desks (OTC) — The best way to avoid slippage, particularly for a very large trading order, is by using an OTC desk. OTC desks allow you to find a fixed price for a single buy order. Because they aren’t done through an exchange, they don’t affect the market for your trade — instead, OTC finds buyers and sellers looking to trade large amounts and set them up directly. There is a set price agreed upon by the seller and buyer, so it avoids any possible slippage, unlike exchanges.
Whether you are new to digital assets or an experienced crypto trader, it is important to understand slippage to keep the value of your assets intact when converting currencies. Use market limited orders and OTC desks, particularly when trading larger sums, as two ways to mediate the risk of slippage.
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Published at Fri, 28 Jun 2019 13:26:42 +0000
