What is Slippage in the Cryptocurrency Market, and What Causes It?

Slippage refers to the difference between the expected or requested price of a trade and the actual execution price. This price discrepancy typically occurs in highly volatile or illiquid markets.

Slippage percentage quantifies the price fluctuation between the order placement price and execution price for a given asset. The cryptocurrency market is extremely volatile, with significant price swings in short periods, making slippage a common occurrence.

What Factors Cause Slippage in the Cryptocurrency Market?

Slippage is usually caused by two main factors:

1. Poor or Insufficient Liquidity on Trading Platforms

If a large market order is placed on a low-liquidity trading platform, the order may not be fully executed at the expected price. Some portions of the order may need to match higher sell orders, leading to slippage.

For example:

• 50 BTC is matched with a sell order at $20,000
• 25 BTC is matched with a sell order at $20,001
• 25 BTC is matched with a sell order at $20,002

The average execution price becomes $20,000.75, which is higher than the original order price of $20,000, resulting in a negative slippage of $0.75 per BTC.

2. High Market Volatility

Due to strong market fluctuations, prices may change after an order is placed, leading to slippage. Suppose an order to buy 100 BTC at $20,000 is placed, and the bid/ask prices at the time are $19,990.50/$20,000.

In a volatile market, high-frequency traders may cause price changes within seconds. Before the order is fully executed, the bid/ask prices may shift to $20,000.5/$20,001, resulting in an execution price of $20,001. This means an additional $1 per BTC, totaling a negative slippage of $100 for the 100 BTC order.

How to Minimize Slippage

1. Use Limit Orders Instead of Market Orders

Market orders are executed at the best available price but do not guarantee a specific execution price. Price fluctuations after order placement can impact execution prices.

In contrast, limit orders ensure that an asset is only traded at the specified price or better. However, the order may not be fully executed if the market price does not reach the specified limit.

2. Trade on High-Liquidity Platforms During Low Volatility Periods

Slippage is more common in volatile and low-liquidity conditions. Trading on platforms with high liquidity and large trading volumes can help reduce this risk. Similarly, trading during stable market conditions minimizes the likelihood of partial or failed order execution.

How to Calculate Slippage

Slippage can be calculated by finding the difference between the current market price and the executed trade price.

Formula:

Slippage = Market Price – Execution Price

For example, if you place a buy order for 1 BTC at $10,000, but it gets executed at $9,800, the slippage is $200 ($10,000 - $9,800).

Slippage percentage can also be calculated as:

Formula:

Slippage Percentage = (Market Price – Execution Price) / Market Price

Using the same example, the slippage percentage is:
$200 / $10,000 = 2%

This means a 2% slippage led to a lower-than-expected purchase price.

Slippage can have both positive and negative effects. If the market moves favorably before execution, traders may get a better price, benefiting from slippage. However, unfavorable movements can lead to unexpected losses.

Many crypto exchanges provide slippage calculators to estimate expected slippage based on trade parameters. Additionally, free online slippage calculators use real-time market data to help traders assess potential execution costs before trading.

Strategies to Reduce Slippage

By understanding slippage and taking preventive measures, traders can optimize their trading performance. Here are some key strategies:

1. Use Limit Orders

One of the most effective ways to reduce slippage is placing limit orders, which ensures that trades execute only at the specified price.

2. Set Stop-Loss Orders

A strict stop-loss helps control price fluctuations before execution, reducing the risk of large losses due to slippage.

3. Monitor Market Conditions

Keeping track of news and events that influence the market allows traders to adjust orders accordingly and avoid sudden price changes.

4. Use Automated Trading Systems

Automated trading bots execute trades based on predefined parameters, reducing the delay time and minimizing slippage risks.

5. Choose Reliable Exchanges

Trading on reputable exchanges with high liquidity, low fees, and fast execution speeds reduces slippage impact.

The Role of Liquidity in Slippage

Liquidity refers to how easily an asset can be traded without significantly affecting its price. Higher liquidity reduces slippage since orders are more likely to be executed quickly at fair prices. Traders should choose exchanges that offer good liquidity to minimize slippage risk.

Slippage in Different Cryptocurrencies

Slippage varies across different cryptocurrencies due to liquidity and volatility differences.

Bitcoin (BTC): Higher liquidity, lower volatility → less slippage

Small Altcoins: Lower liquidity, higher volatility → higher slippage

Before trading, traders should research an exchange’s order book and trade volume to estimate potential slippage. Additionally, different exchanges may have varying slippage levels due to differences in market depth and activity.