Slippage in crypto occurs when a cryptocurrency is traded at a price different from its expected price. The main reason for slippage in crypto is the general volatility of the crypto market and the low liquidity of the tokens under consideration. Slippage is caused by the difference in price between the time at which the order was placed and the time at which the trade was executed.
Slippage in the crypto market is not always problematic. If the price increases from what it was at the time of placing the order, then the slippage would be positive. Positive slippages are welcomed. However, we cannot predict the direction of a slippage. So, it is always better to take steps to prevent slippages in crypto.
Causes Of Slippage In Crypto
Several underlying factors cause slippage in cryptocurrency.
- Insufficient Pool Liquidity: You may experience slippage if you are trading an asset with low liquidity. Trades will cause significant changes in the price curve of such assets and cause slippage as the liquidity of the already low asset will again be disrupted.
- Volatile Market: Market volatility is another major cause of slippage. Crypto assets are highly volatile; the price varies rapidly even before a trade is executed after the order has been placed. Changes may also happen within a single block confirmation time. The market is highly unpredictable for cryptocurrencies.
- Large Trade Size: The size of the trades determines the amount of liquidity consumed from the pool. This increases the impact on the price and causes further slippage.
- Longer Block Confirmation Times: Block confirmation time is the time taken for a transaction to be executed and confirmed on-chain. If the confirmation time is long, it can cause slippage.
- Protocol Execution Speed: If the transactions are executed faster, the chance of price fluctuations remains low. On the other hand, slower transactions increase the risk of price fluctuations.
Positive And Negative Slippages
Slippages can be positive based on whether the price increases or decreases during the time allocated for the completion of transactions.
Positive slippage occurs when the price during the trade increases from the expected price of the token. Positive slippage results in you getting more tokens for the amount spent. Low trading volume, high liquidity, and market stabilization in terms of price are the reasons for the positive slippage of cryptocurrencies.
On the other hand, negative slippage occurs when a crypto asset trades at a price lesser than the expected price. In the case of a negative slippage, you will have to pay more to get the designated number of tokens or you will get less number of tokens than expected for the same price. High trading volumes, low liquidity pools, market volatility, and block confirmation delays are the major causes of negative slippage.
How To Reduce The Chances Of A Slippage?
With some amount of care and vigilance, you can minimize the ill effects of slippage in cryptocurrency transactions. Here are some strategies you can employ to reduce slippage in the market.
- Limiting the order is an effective method of countering slippage. In limit orders, the high and low rates are already fixed. If the price of the tokens fluctuates to a level beyond the said limit, the trade gets reverted and will be carried out later when the price gets better.
- You can set a predetermined slippage tolerance level well before the trade commences. Any price fluctuations beyond this level will result in the trade being reverted. The tolerance level should be realistically set so that too many trade reversals do not happen.
- You can avoid negative slippage by avoiding trading assets with low liquidity pools,
- You can avoid trades with large volumes to avoid any significant impact on the price curve of the concerned cryptocurrency.
- Avoid trading during times of network congestion as such delays can pave the way for price fluctuations.
The Bottom Line
Slippage is unavoidable in a crypto trade due to the various factors mentioned in this article. However, you can reduce the impact of slippage with a little care and adopting the right strategy. You can leverage the tips and tricks discussed in this article to optimize your trades and avoid any significant losses.
