The bid-ask spread is an important concept in crypto trading. Read ahead to find out what this term means!
What Is A Spread?
The crypto bid-ask spread definition is similar to the one applied to the stock market. It refers to the difference between the highest bid and the lowest ask for an asset. In other words, it is the gap between the maximum price an individual is willing to pay for a cryptocurrency and the minimum price at which someone is ready to sell it.
What You Need To Know About The Spread
You can calculate the crypto bid-ask spread using this formula:
Spread = Lowest Ask – Highest Bid
For instance, if the lowest asking price for Bitcoin is $17,260 and the highest bid for it is $17,253, the spread would equal $7.
Aside from finding out the spread’s raw value, it is also useful to know it as a percentage. Here’s how to calculate it:
Spread Percentage = (Spread / Lowest Ask) x 100
Thus, in the example, the spread percentage would equal approximately 0,04%.
The bid-ask spread can be used to estimate an asset’s supply, demand, and liquidity and is a critical factor to consider when assessing the profitability of a potential trade.
A tight bid-ask spread typically means that a cryptocurrency has high liquidity, so the sellers can execute their orders without triggering significant changes in an asset’s price. The most prominent crypto pairs, such as BTC/USD and ETH/USDT, typically have narrower spreads.
Lesser-known and newer cryptocurrencies, on the other hand, usually have wider bid-ask spreads. In such cases, you are likely to encounter substantial price fluctuations when closing large-volume orders and be at risk of paying more than expected.
Thus, if the spread is higher than 1%, it’s advisable to trade with a limit order to get the desired price without experiencing significant losses. Alternatively, you can also try checking other trading exchanges that may offer a more reasonable spread on the crypto pair in question.
