What Is Slippage in Crypto?
Slippage in crypto refers to the difference between the expected price of a trade and the actual price at which it is executed. This phenomenon typically occurs during periods of high volatility, low liquidity, or when large orders are placed, causing price fluctuations between the moment a trader places an order and when it gets filled. Slippage can be both positive (resulting in a better price) or negative (leading to a worse price than expected). In cryptocurrency trading, slippage is particularly common in decentralized exchanges (DEXs) due to price variations in liquidity pools and automated market makers (AMMs).
What Is the Meaning of Slippage in Trading?
The meaning of slippage in trading extends beyond crypto to traditional markets like forex and stocks. It occurs when an asset's price changes while an order is being processed. In crypto, where prices can swing rapidly, slippage is more frequent. Traders using market orders are most affected since their orders execute at the best available price, which might differ from their expected price.
How Does Slippage in Crypto Work?
Slippage in crypto happens due to market volatility and insufficient liquidity. When a trader submits an order, it goes through a matching process. If the market price moves before the order is completed, the final execution price may differ. For example, if a trader places an order to buy Bitcoin at $100,000, but by the time it executes, the price has jumped to $100,200, the $200 difference is slippage.
What are the types of Slippage?
There are two primary types of slippage: positive slippage and negative slippage.
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Positive Slippage: This occurs when a trader receives a better price than expected, usually due to rapid price movements in their favor. For example, if a trader places a buy order at $100 and the order is executed at $98, the trader experiences positive slippage of $2.
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Negative Slippage: This is the more common scenario, where the execution price is worse than expected. For instance, if a trader places a sell order at $50 and the order is filled at $48, the slippage is $2 in the trader's disadvantage.
What Is Slippage Tolerance in Crypto?
What is slippage tolerance? Slippage tolerance is the maximum percentage difference a trader is willing to accept between the expected and actual trade execution price. Traders can set slippage tolerance in most exchanges, and it is particularly useful on decentralized platforms like Uniswap and PancakeSwap. If slippage is set too low, the transaction might fail, while setting it too high increases the risk of losing more value than anticipated.
What Happens if Slippage Is Too Low?
If the tolerance for slippage is too low, the trade might not execute at all. This is common in DEXs where prices fluctuate rapidly. For instance, if a user sets a slippage tolerance of 0.1% but the price moves by 0.2% before the transaction is confirmed, the order will fail. This can result in wasted gas fees in Ethereum-based transactions.
Why Is Slippage in Trading Important?
Understanding slippage in trading helps traders minimize losses and improve trade execution. High slippage can result in unexpected costs, especially in non-liquid markets or during major price swings. By adjusting slippage tolerance, traders can balance between execution speed and price stability.
How to Reduce Slippage in Crypto Trading?
To minimize crypto slippage, traders can:
- Use limit orders instead of market orders to control the execution price.
- Choose trading pairs with more liquidity when the order amount exceeds the best offer.
- Trade during high liquidity periods when there are more buyers and sellers.
- Use moderate slippage tolerance settings to ensure execution without excessive losses.
- Avoid trading during extreme volatility to reduce price discrepancies.
- Use exchanges with deep liquidity to get better pricing.
How Does Slippage Affect DeFi Trading?
In Decentralized Finance, when trading crypto, slippage is a major factor due to automated market makers (AMMs). Liquidity pools determine asset prices, and large trades can significantly impact them. Traders must carefully set slippage tolerance when swapping tokens to avoid failed transactions or unexpected price changes.
Bottom Line
What does slippage mean in crypto? It refers to the price difference between placing and executing a trade, often due to volatility and liquidity constraints. In crypto, slippage is a key factor in both centralized and decentralized exchanges, affecting trade execution and costs. By understanding what is slippage in trading and using strategies like adjusting slippage tolerance, using limit orders and choosing trading pairs with better liquidity, traders can mitigate risks and optimize their trades.
