Slippage occurs when cryptocurrency traders place buy or sell orders on an exchange, expecting execution at a specific price, but the order fills at a different rate. This gap between the expected and actual trade price is known as slippage. The slippage percentage reflects how much an asset's price has deviated during the transaction.
Understanding Slippage in Crypto Trading
Price volatility in cryptocurrencies often leads to slippage, influenced by factors like trading volume and market liquidity. High slippage can result in significant losses, so traders employ strategies to mitigate its impact:
- Limit Orders: Prefer these over market orders to avoid unfavorable prices.
- Slippage Tolerance: Set optimally—too low may prevent execution, too high risks frontrunning.
Types of Slippage
- Positive Slippage: The executed price is better than expected (e.g., lower for buys).
- Negative Slippage: The executed price is worse than expected (e.g., higher for buys).
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Causes and Impact of Slippage
Slippage stems from rapid price movements due to:
- Market Volatility: Crypto prices fluctuate intensely.
- Low Liquidity: Thin order books amplify price gaps.
- Exchange Type: Decentralized exchanges (DEXs) like Uniswap often face higher slippage.
Managing Slippage
- Monitor Volatility: Stay updated on asset-specific trends.
- Choose Liquid Markets: Trade high-volume pairs to reduce slippage.
- Adjust Order Types: Use limit orders during volatile periods.
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FAQs on Slippage
Q1: Is slippage unique to cryptocurrencies?
A: No, it occurs in forex and stocks too, but crypto’s volatility makes it more pronounced.
Q2: How do I calculate slippage percentage?
A: Slippage % = [(Executed Price − Expected Price) / Expected Price] × 100.
Q3: Can slippage be entirely avoided?
A: No, but limit orders and liquid markets help minimize it.
Q4: Why does Uniswap have high slippage?
A: DEXs rely on liquidity pools—low liquidity or large trades cause price shifts.
Q5: What’s a reasonable slippage tolerance?
A: Typically 0.1%–1% for stablecoins, higher for volatile assets (e.g., 3%–5%).
Q6: Does slippage affect long-term investors?
A: Less impact for holders; day traders and arbitrageurs face higher risks.