What is Slippage in Cryptocurrency?

Slippage is an unavoidable aspect of cryptocurrency. If you are just starting out the trading journey, then you must understand and mitigate it. Or else, you may encounter unexpected losses or missed opportunities. 

Let’s discuss in detail—to explore what is Slippage in crypto, why it occurs, and how you can avoid it.

What is Slippage in Crypto?

Slippage in cryptocurrency trading refers to “the difference between the expected price of a trade and the actual price at which it is executed” in real-time. This occurs due to the rapid price fluctuations and varying liquidity levels inherent in the crypto markets. Remember that Slippage can impact both buying and selling orders. 

Let’s say you want to buy 1 Bitcoin and place a market order when the price is $30,000. However, by the time your order is executed, the price has risen to $30,200. This $200 difference between the expected price and the actual execution price is known as slippage. 

Similarly, if you were selling 1 Bitcoin expecting to get $30,000 but the price drops to $29,800 before the sale goes through, you would experience a slippage of $200. 

Now, after grasping what is slippage in crypto, let’s move forward to unravel its causes. 

Types of Slippage in Crypto Trading

Let’s talk about the two main types of slippage you’ll encounter in crypto trading: price slippage and liquidity slippage. Both types of slippage are part of the crypto world. You can’t avoid them completely, but knowing what causes them helps. 

1. Price Slippage

Price slippage is what happens when you expect to trade at one price but end up with something else. This is common when the market is moving fast. Prices can change in the blink of an eye, especially in crypto.

Here’s an example: Say you’re trying to buy Bitcoin at $30,000. You hit “buy,” but by the time your order gets processed, the price has moved to $30,200. You just paid $200 more than you planned. That’s price slippage. It’s frustrating, but it happens when the market is volatile. Always keep this in mind when trading during news events or big market swings.

2. Liquidity Slippage

Now, liquidity slippage is a bit different. This happens when there aren’t enough buyers or sellers at the price you want. The system still fills your order, but it spreads it across multiple price points. This can lead to worse results than you expected.

For example, you’re selling 1,000 units of a small altcoin for $5 each. If there aren’t enough buyers at $5, some of your coins might sell at $4.80, and others at $4.50. By the time your order is complete, the average price you got is lower than you wanted. That’s liquidity slippage, and it’s more common with smaller coins or during off-peak trading hours.

Impact of Slippage on Cryptocurrency Trading

Slippage might sound like a small issue, but its impact on your trading can be massive. Have you ever placed a trade and thought, “Why didn’t I get the price I wanted?” That’s slippage at work. Let’s dive into how it can affect your profitability and strategies.

First, slippage directly cuts into your profits. Negative slippage means you pay more when buying or get less when selling. For instance, imagine planning to buy Bitcoin at $30,000. By the time your trade executes, the price has jumped to $30,500. That $500 difference is money out of your pocket. Can you see how even small slippage can add up over multiple trades? Over time, this can turn a winning strategy into a losing one. Always ask yourself: Is the trade worth the potential slippage?

Now let’s talk about volatility. Slippage is at its worst in fast-moving markets. Prices can swing wildly between placing and executing an order. Picture trading during a big news event—prices spike, your order lags, and you end up with a much worse deal. How would you handle that? Would you wait out the storm or adjust your strategy? It’s important to recognize that high volatility amplifies the risk of slippage. Keeping trades smaller or using limit orders can help manage this risk.

Finally, large trades and low liquidity can amplify slippage even further. If the market can’t handle the size of your order, it will fill it at different price levels. For example, selling 1,000 units of a niche altcoin might result in only half of them selling at your desired price, with the rest selling for less. Do you trade large volumes? If so, think about how liquidity affects your outcomes. On decentralized platforms, this issue is even more common. Setting a slippage tolerance can be a lifesaver here, ensuring you control how much slippage you’re willing to accept.

So, think about your own trades. Have you factored in slippage? Have you adapted your strategies to account for it? The key takeaway here is that slippage isn’t just an inconvenience—it’s a real cost that affects your profits, risks, and decisions. Plan ahead, understand market conditions, and stay prepared. That’s how you turn slippage from a problem into something you can manage.

Why Does Crypto Slippage Occur? 

Crypto slippage occurs due to several key factors that influence the price at which a trade is executed compared to the expected price:

Market Volatility

Cryptocurrency markets are highly volatile, as the prices keep fluctuating within short periods. So—slippage occurs when there are rapid price changes between the time an order is placed and when it is executed.

Low Market Liquidity

You need to understand that there aren’t enough crypto buyers or sellers to fill large orders at the expected price. This results in orders being partially filled at different prices—which causes slippage.

Order Size

Large orders are more likely to experience slippage—especially if the market cannot accommodate the entire order at the desired price. Basically, parts of the order are filled at progressively less favorable prices.

Network Congestion

Transactions can take longer to process during times of high network activity. The delay means the price may change before the transaction is executed. So—this network congestion leads to slippage.

Execution Speed

The time it takes for an order to be processed and executed can also contribute to slippage. Faster execution times can reduce the risk of slippage. Whereas slower execution can increase it.

Slippage on Decentralized Platforms VS Centralized Exchanges

How to Calculate Slippage in Crypto? 

First of all, determine the price at which you intended to execute your trade. For example, if you planned to buy Bitcoin at $40,000, this is your expected price.

Next, you need to find out the actual price at which your trade was completed. Let’s suppose your order was executed at $40,200.

Subtract the expected price from the executed price. In this case, it’s $40,200 minus $40,000, which equals $200.

Finally, you need to express slippage as a percentage. So, divide the price difference by the expected price and then multiply by 100. 

You’ll see $200 divided by $40,000 equals 0.005. Simply, multiply by 100 to get 0.5%.

How to Avoid Slippage in Crypto Trading?

Slippage can be frustrating, but the good news is that you have plenty of tools and strategies to deal with it. Let’s break this down step by step so you can handle it like a pro.

1. Use Limit Orders

The first thing to remember is that limit orders give you control. With a limit order, you set the exact price you’re willing to buy or sell a cryptocurrency. If the market doesn’t meet your price, the trade won’t execute. This protects you from paying more than you intended or selling for less than you expected. 

For example, you want to buy a coin at $50, but the market is bouncing between $49 and $55. Setting a limit order at $50 ensures that you’ll only pay what you planned. Yes, it might mean waiting longer for the trade to go through, but patience is better than losing money to unexpected price jumps.

2. Set a Slippage Tolerance

Let’s talk about slippage tolerance. On many trading platforms, you can adjust the percentage of slippage you’re willing to accept. This is particularly important if you’re trading in volatile markets or with low-liquidity tokens. 

For instance, if you set a slippage tolerance of 1%, and your expected trade amount is $1,000, the trade will cancel if the price moves beyond $10 up or down. This keeps you from being surprised by a price change that could cost you significantly. Start with a low tolerance and increase it only if you absolutely need to ensure the trade goes through.

3. Avoid Market Orders in Volatile Markets

Market orders are convenient, but they’re risky in volatile conditions. When you place a market order, it executes at the best available price, which might not be anywhere close to what you expected. 

Let’s say a coin is trading at $100. You place a market buy order, but before it executes, the price spikes to $110. You just paid 10% more than you wanted. It’s tempting to use market orders for speed, but in fast-moving markets, the price you see is often not the price you get. Stick to limit orders whenever you can.

4. Trade During Peak Liquidity Hours

It is important to time your trades. Liquidity refers to how many buyers and sellers are active in the market. Higher liquidity means your order is more likely to be filled at your desired price. Think of it like shopping at a busy marketplace—there’s plenty of supply and demand, so prices stay stable. 

On the other hand, trading during off-hours is like going to an empty store. You might end up paying more or waiting longer to complete your purchase. Research the times when trading activity is highest and aim to place your trades during those periods.

5. Avoid Trading Around Major News Events

Major news events create chaos in the market. Prices can spike or crash in seconds, and slippage becomes almost unavoidable. Let’s say there are some regulatory announcement drops—everyone rushes to buy or sell, and the market goes wild. 

If you place a trade during this period, the execution price could be miles away from what you expected. The smart move here is to wait. Let the market settle before placing your trade. A little patience can save you from unnecessary losses.

6. Break Down Large Orders

If you’re trading a significant amount, breaking it into smaller chunks is a practical way to minimize slippage. Let’s say you want to sell $50,000 worth of cryptocurrency, but the market doesn’t have enough buyers at your price. Instead of executing the entire order at once, sell in smaller pieces. 

For example, sell $5,000 at a time. This reduces the risk of your trade moving the market price and ensures you get a more consistent execution rate. It might take longer, but it’s worth it to protect your returns.

7. Use Trading Automation

Speed is everything in trading. Manual execution leaves you vulnerable to delays, and those delays can lead to slippage. Automated trading systems can act the moment market conditions match your criteria. 

For instance, if you want to buy a coin at $100, the system will execute the trade instantly when the price hits that point. Automation eliminates hesitation and ensures you get in or out of the market at the right time.

8. Monitor Network Congestion

Finally, be aware of network congestion. If the network you’re trading on is overloaded, your transactions may be delayed, and slippage can occur. It will be like rush-hour traffic—everything slows down, and you might not arrive at your destination on time. Before you trade, check the network’s status. If transaction fees or confirmation times are unusually high, it might be better to wait. 

Remember that timing your trades during quieter periods ensures faster execution and less risk of slippage.

Relevant Read: What is the Best Time to Trade Forex

Quick Tips to Minimize Crypto Slippage

• Use limit orders to control the exact price at which your trade executes.
• Avoid using market orders during periods of high volatility.
• Trade during peak hours when market liquidity is higher.
• Stay clear of trading during significant news events that can cause sudden price swings.
• Break large orders into smaller ones to minimize their impact on the market.
• Choose trading platforms with high liquidity to ensure smoother order execution.
• Monitor the order book to gauge market depth and potential price movements.

Final Words

After going through our insights, you must understand what is slippage in crypto, right?

Now, it is worth noting that the level of slippage varies among different cryptocurrencies due to differences in liquidity and volatility. For example Bitcoin has lower slippage—whereas the majority of Altcoins have a higher slippage.

You should always determine your slippage tolerance while trading. It is basically the maximum acceptable price difference for executing a trade. Remember that higher volatility might necessitate higher slippage tolerance to ensure timely trade execution.