Spread in crypto trading refers to the gap between the buying and selling price of a particular asset. It’s a critical indicator that can help you determine the liquidity and efficiency of the crypto market and make purchasing and selling decisions accordingly.
Join us as we take a closer look at what good spread is and why it’s an important consideration in crypto trading.
What is Spread?
Most crypto transactions involve two prices; “ask” which is the prices set by the sellers and “bid” which is the highest amount any buyer is willing to pay. The difference between the ask and bid price is the spread.
For example, in the screenshot below, the ask price for BTC (lowest price a seller is looking to sell BTC) is $28,230.84. The bid (maximum that any buyer is willing to pay) is $28,230.83. In this situation, the spread is only $0.01, and is the lowest spread possible.
The amount of spread for any market depends on the Market makers (buyers and sellers) as they provide liquidity by quoting both the bid and ask prices. But, there are also a few factors that can affect the amount of spread. These include:
How to define Good Spread
In its simplest form, a narrow spread (small difference between ask and bid) is a good spread. This is because a narrow spread indicates high liquidity in a market. It’s also accompanied by low trading costs which can have a direct positive impact on your profits.
So, how narrow is narrow enough?
Well, in our experience, there is no specific number or percentage that makes a spread good or bad. Regardless of the exact number, just keep in mind that a low or narrow spread is better than a high one.
Importance of Good Spread in Crypto
For many crypto traders, a good spread can be the difference between profit and loss. It also makes it easier for traders to enter and exit the market without experiencing any unexpected losses — increasing the efficiency and effectiveness of crypto trading.
Advantages of good spread
Two of the biggest advantages of trading crypto with a narrow spread for us are:
Low transaction costs
A good spread directly affects the cost of executing a trade, particularly if you use a crypto broker, where you buy and sell crypto directly from the site.
In the example below, you can see the price to buy Bitcoin, and sell Bitcoin, at the exact same time. To buy Bitcoin, the price is $42,334.17, and to sell Bitcoin, it is $41,915.19.
The spread is $418.98, or 0.99%. This means that if you were to buy Bitcoin at this broker, and immediately sell it, you would lose 0.99% due to spread, and this is without taking into account any fees involved.
Slippage is the difference between the expected price of a crypto asset and the price at which a transaction is completed. A good spread reduces this spillage, which — in turn — ensures that your trading strategies perform as expected.
Good spread and the market
The importance of good spread goes beyond any individual trader as it has a direct impact on the market as a whole.
For starters, a good spread narrows down the variation in price discovery — ensuring that the asset is traded at its true value.
Additionally, a good spread encourages more trading activities, resulting in higher liquidity and market stability.
Factors Affecting Good Spread
As we mentioned earlier, on a micro level, spread is determined by the prices set by individual traders. But, the price discovery process of these traders can be influenced by a number of factors. The most important of these include:
Relationship between trading volume and spread
A crypto asset with a high trading volume will usually have a narrow spread. When a lot of people are trading an asset, more of them are willing to ask low or bid high, both of which tightens the spread.
Impact of market volatility
High volatility often leads to wider spreads. This is because traders become more cautious when trading an asset with a fluctuating price. So, they are more likely to adjust their bids and asks to reduce their risk exposure.
The influence of order book depth
A greater order book depth indicates higher liquidity which can lead to a tighter spread. This works the other way as well where a shallow order book can cause the spread to expand.
Evaluating Spread in Crypto
By now, you should have a good understanding of spread and the importance of good spread in crypto trading. The big question now is, how do you calculate spread?
Fortunately, calculating spread is a matter of simple mathematics. All you have to do is subtract the highest bid from the lowest ask. Here is how to calculate spread:
Spread = Lowest Ask - Highest Bid
You can also take this a step further and calculate the percentage spread:
% Spread = (Spread/Lowest Ask) x 100
Utilizing spread as an effective indicator
Given its direct correlation with the trading price of an asset, spread is one of the most useful indicators in the crypto market. Learning how spread works can help you minimize unnecessary spending and optimize your trades for maximum profits.
However, we do not recommend relying solely on spread when trading crypto. It is just as important to consider other essential indicators like Moving Averages and the Fibonacci Retracement if you want to make informed purchasing/selling decisions.
We cannot overstate the importance of a good spread in crypto trading. It is a vital indicator that makes it easy to evaluate the liquidity and trading efficiency of a particular asset. You can then use these metrics to increase profits by deploying a trading strategy that fits the current market situation.
In other words, it wouldn’t be wrong for us to say that you need to evaluate spread when trading crypto.
So, if you want to succeed in the crypto world, make sure to keep an eye out for a good spread and trade accordingly.